Fiscal Rules and the Demand for International Reserves

Over recent decades, international reserves have risen across countries. While prior research has largely explained this trend through precautionary and mercantilist motives, the influence of fiscal institutions has received limited attention. This study explores the role of fiscal rules as an important, though often overlooked, determinant of reserve accumulation from the perspective of fiscal governance. Using panel data for 93 countries from 1990 to 2020, we find that the implementation of fiscal rules is significantly and negatively associated with the ratio of reserves to GDP. This relationship remains robust across alternative specifications and estimation methods. Additional evidence indicates that lower reserve demand under fiscal rules is accompanied by reduced consumption and improved current account balances. These findings suggest that international reserve accumulation is closely linked to fiscal institutionalization, implying that credible fiscal rules can enhance the efficiency of reserve policy and contribute to more effective international liquidity management.