The Determinants of International Reserves in the Emerging Countries: a Non-Linear Approach

Abstract

In this paper we adopt a non linear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a panel smooth transition model, that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a non linear behavior in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables- out of seven candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.International Reserves, Precautionary Demand, Mercantilist, Global Imbalances, Panel Smooth Threshold Regression Models.