International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz
APPLYING THE w-k MODEL TO SELECTED LATIN AMERICAN ECONOMIES

The w-k model is a means of assessing the volume of international reserves held by a central bank, trying to take into account international financial conditions since it factors into its calculation key variables such as short-term debt and country risk,6 which is the weighting that multiplies the M2 fractions (in this case 5% and 10%, given that each country has a floating exchange rate policy). It is interesting to note this model because it reflects in some way the unfavorable situation facing each of these emerging economies. The precise result shows that the four countries exceed the level considered to be optimal. (Table 2, Figures 7a and 7b).

The result is basically explained by the country risk factor which is calculated as the difference between the rate of each country's federal reserves and those of the United States. In other words, the rate differential that emerging countries must offer through international capital flows. The resulting data is revealing in several ways: firstly, there is a marked change in the policy of reserve accumulation since 2007 due to the fact that the crisis at that time added reasons to manage ir levels in the face of a possible speculative attack; secondly, a clear increase is visible both in the reserves calculated as being optimal for those years, explained by the increase in the M2 monetary aggregate, as well as the country risk that these economies had to weather during the global financial crisis. In other words, the central banks of the countries in question intervened indirectly in the foreign exchange markets by actively using their respective monetary reserves, which is consistent with a floating exchange rate policy adopted by these four countries; however, this mechanism is used to avoid inflation pass-through (Table 2).

Figure 7a.International reserves and optimal demand of international assets
Argentina and Chile, 1995-2009
(Annual balances and forecasts in us$ billions)
Source: Estimates of authors based on data from each country's central bank, World Bank, International Monetary Fund, and cepal.

Figure 7b .International reserves and optimal demand of international reserves Brazil and Mexico, 1995-2009
(Annual balances and forecasts in us$ billions)
Source: Estimates of authors based on data from each country's central bank, World Bank, International Monetary Fund, and cepal.

6 In this case the country risk was calculated by calculating the difference between the reference rate of each country and that of the United States.