To hoard, or not to hoard? Motives for reserve accumulation and its long-run economic consequences

Many emerging market economies are accumulating reserves at unprecedented scales in recent years. Some argue that by accumulating huge amounts of reserves, countries keep their currencies undervalued and gain unfair competitive advantages in trade. Others contend that reserves can serve as self-insurance to protect countries from external shocks. This paper examines these competing views empirically. Evidence from regression analysis and panel vector autoregression suggests the self-insurance motives to be more probable. Reserve accumulation can also positively influence economic growth, especially in the context of emerging market economies. Investment is also found to be an important channel through which reserve accumulation influences growth