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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 19, No. 2, pp.199-214
ISSN: 1225-0279 (Print)
Print publication date 31 May 2006
Received 26 Aug 2005 Revised 24 Nov 2005

Portfolio-Flow Volatility and Demand for International Reserves

Changkyu Choi ; Seung-Gwan Baek
Associate Professor, Department of Economics, Myongji University, 50-3, Namgajwa-dong, Seodaemun-gu, Seoul 120-728, Korea, Tel: +82-2-300-0687, Fax: +82-2-300-0654 ckchoi@mju.ac.kr
Professor, Department of Economics, Hongik University, 72-1. Sangsu-dong, Mapo-gu. Seoul 121-791, Korea, Tel: +82-2-320-1802, Fax: +82-2-322-8845 sbaek @wow.hongik.ac.kr

JEL Classfication: C23, F32

Abstract

This paper examines the importance of portfolio-flow volatility as a determinant of the demand for international reserves over the 1980-99 period. Using panel data, we find that portfolio-flow volatility significantly raises the level of reserve holdings. Especially reserve accumulation is most sensitive to the volatility of portfolio balance (net flows). Capital account liberalization has increased uncertainty in the world economy, thereby making open economies more vulnerable to international financial crises. The regression results imply that monetary authorities have accumulated more precautionary reserve balances against increased uncertainty in portfolio flows as capital account liberalization progresses. As in previous studies, real openness is an important explanatory factor in determining the demand for reserves.

Keywords:

Portfolio-flow volatility, International reserves, Precautionary demand

Acknowledgments

respectively. We are grateful to the editor of this journal and anonymous referees for helpful comments and suggestions.

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