Governments of many emerging market countries have built up large international reserves in the past two decades. This is primarily because there have been output concerns such as mercantilism and export-led growth, and also precautionary savings against sudden stops.
This research considers both mercantilistic and self-insurance motives using a SOE-DSGE model and data for 24 emerging market countries. The paper therefore provides empirical evidence for the two motives and proposes an SOE model that includes these features and enables a joint analysis of debt, reserves, and the real interest rate. It serves as a bridge towards future fully micro-founded models. It also conducts various quantitative analyses based on the estimated models.
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