International Reserve Accumulation in Emerging Market Economies: The Role of Global Factors

This study examines whether global liquidity and risk matter for the international reserve accumulation in 46 countries characterized as Emerging Market Economies (EMEs) by the International Monetary Fund (IMF) from 2000 to 2019. By using panel data techniques and a broad dataset based on Lane and Milesi-Ferretti's (2022) External Wealth of Nations II database and various data sources for global factors, this paper first shows that global liquidity is positively associated with international reserve holdings. Second, in consideration of greater reliance on financial factors, it tests the joint effects of capital inflows, capital controls, and global factors and provides evidence that countries tend to accumulate larger international reserves as (i) external liabilities grow in periods of abundant global liquidity and (ii) capital control policy tightens in periods of high confidence loss. Finally, this work questions which type of capital inflow has a greater impact on international reserve holdings and whether the drivers of reserve accumulation evolved over the sample period. The results suggest that countries respond to FDI inflows more than other inflows, and the impacts of global liquidity and risk become more apparent between 2008 and 2019.