TY - JOUR
T1 - Mercantilism and China's hunger for international reserves
AU - Schroder, Marcel
PY - 2017
Y1 - 2017
N2 - This paper is motivated by the popular view that the surge in China's foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much "mercantilist" and "precautionary" motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China's case. The results suggest that mercantilism accounts for less than 10% of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China's international reserves.
AB - This paper is motivated by the popular view that the surge in China's foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much "mercantilist" and "precautionary" motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China's case. The results suggest that mercantilism accounts for less than 10% of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China's international reserves.
U2 - 10.1016/j.chieco.2016.11.004
DO - 10.1016/j.chieco.2016.11.004
M3 - Article
VL - 42
SP - 15
EP - 33
JO - China Economic Review
JF - China Economic Review
SN - 1043-951X
ER -