Regional reserve pooling arrangements

Abstract

Recently, several emerging market countries in East Asia and Latin America have initiated intra-regional reserve pooling mechanisms. This is puzzling from a traditional risk-diversification perspective, because country-level shocks are more correlated within rather than across regions. This paper provides a novel rationale for intra-regional pooling: if non-contingent reserve assets can be used to support production during a crisis, then a country's reserve accumulation decision affects not only its own production and consumption, but also its trading partners. If consumption through terms of trade effects. These terms of trade adjustments can be fully internalized only by a reserve pool among trading partners. If trade linkages are stronger within rather than across regions, then intra-regional reserve pooling may dominate inter-regional pooling, even if shocks are more correlated within regions.