Why Countries Accumulate Foreign Reserves? A Dynamic Panel Approach

Foreign reserves accumulation is a widespread phenomenon in recent years, particularly among emerging economies. Using a panel of 139 countries for the period 1973-2003, we demonstrate the need of using both a dynamic specification of demand reserves and the GMM-System estimator. These improvements change results found by previous studies on reserves determinants. Opportunity cost, exchange rate regime and both trade and financial volatility are no longer statistically significant. Openness, regional imitation, persistence, a U-shaped relationship between reserves and development and the global financial deregulation are the factors driving reserve hoarding. Results suggest that financial openness and economic development are more important determinants than exchange rate flexibility in order to explain recent reserves accumulation