Volume 43, Number 169,
April-June 2012
International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz
THEORETICAL CONSIDERATIONS ON
OPTIMAL INTERNATIONAL RESERVE LEVELS ( ...continuation )

As variables, this model uses external short-term debt as a percentage of the M2 monetary aggregate (which must be in the range of 10 to 20% of the total of the M2 for the fixed exchange rate for flexible parity). This percentage of M2 is incorporated in order to prevent capital flights; and this fraction must also be adjusted by country risk. Therefore, Wijnholds-Kapteyn give the following equation to calculate the optimal reserve level:

ir* = (STD) + ( α ⋅ CR)

where:

ir* = Optimal international reserves

STD = Short-term external debt

α = Fraction of M2

CR = Country risk

INDICATORS AND MODELS TO DETERMINE OPTIMAL LEVELS
OF INTERNATIONAL RESERVES

The following is an empirical analysis of four emerging Latin American economies: Argentina, Brazil, Chile and Mexico, between 1995 and 2009, which according to our analysis have followed policies of accumulation of foreign currencies for precautionary reasons. The first premise is that there is a direct correlation between said policy and the determination to maintain a specific (or stable) exchange rate, which helps them manage inflation pass-through; the second is that monetary reserves spiraled after the 2007-2008 period, due to a strong depreciation of these currencies; therefore the central banks increasingly tended to acquire foreign currencies to sustain their respective exchange rates. Each of these countries established specific policies to deal with the crisis, but generally there was an open intervention in managing the exchange rate, as an attempt to handle the high levels of global uncertainty. This involved increasing their reserves, despite the opportunity cost that this represented for their economies, given the differentiation of real interest rates. 5

In these four Latin American countries there is evidence of an increasing and accelerating accumulation of foreign currencies at the end of the 1990s, but the increase was greatest after 2007, as a means of mitigating the crisis. We can also see a clear inverse relationship between the increase in these foreign currency reserves and the stability of the countries’ exchange rate.

Even though the Latin American economies in question have implemented specific economic policies in response to their economic cycles and situations, generally they show analogous results in regards the accumulation of international assets under the concept of precautionary international reserves, as a way and means of managing speculations on the value of their exchange rates, avoiding inflation pass-through at the level of their internal prices, and attempting to handle short-term capital flight.

5 This is made clear with the decisions recently taken by central banks in the countries in question: Argentina applies the most controls on the demand for currencies. A sliding exchange rate with a managed floating regime, depreciation against the dollar: by 12.5% between September 1 and December 3 2008. On March 30, 2009, the central institute established a pre-agreement for a currency swap deal with the Central Bank of China in the region of us$10 billion; this would operate as a contingency measure to strengthen the position of the reserves held by the issuing institution. Restrictions were also announced on imports in sensitive national industrial sectors. Brazil's Central Bank announced that it was prepared to use up to us$36 billion of monetary reserves for loans to companies experiencing difficulties in refinancing debt on the foreign market.
Chile announced a tender of us$5 billion for a currency swap (1 to 6 months). Similarly, measures are being taken to improve the coverage of bank loans for exporters and the expedited return of vat credits to exporters.
In order to reduce exchange-rate volatility, Banco de México (Mexico's Central Bank) directly intervened in the market through extraordinary sales of just over us$1 billion. It also applied for the process of the dollar auction and placed us$400 million using a mechanism set up jointly by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público–shcp) and the Banco de México, from February 3 to 6, 2009. These direct interventions will continue in the event of continuing international financial volatility. Banco de México set up a swap deal worth us$30 billion with the Federal Reserve.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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