新興經濟體的現象分析
 
本文的目的是研究財政與經濟之間關系的不確定性(風險)以及財政對國際儲備的需求。此外,還會進一步分析所選定的新興經濟體的上述關系和政治風險狀況之間的聯系。通過對來自20個新興國家的座談小組分析,實證結果表明,新興經濟體持有國際儲備的多少很大程度上依賴于財務風險指標的波動。此外,外匯儲備需求函數和財務風險指標之間的相關性也或多或少地存在國家的政治因素。制定政策時應從收益儲備最優模型的角度考慮政治風險，因為忽略這個因素可能會低估持有儲備的成本。

關鍵詞:國際儲備、自我保護動機、國家風險

文獻筆記

Siti Nurazira Mohd Daud是一個伊斯蘭教的馬來西亞理科大學高級講師,也是這所學校伊斯蘭金融和財富管理研究所的研究員(IFWMI)。她在英國南安普頓大學獲得了經濟學博士學位。
 
The Evidence From Selected Emerging Economies Economics Essay
 
The objective of this paper is to investigate the relationship between financial and economic uncertainty (risk) and the demand for international reserves. In addition, the association between this relationship and the political risk condition is further analyzed for selected emerging economies. By using panels of 20 emerging countries, the empirical results show that the decision by the emerging economies to hold international reserves is largely dependent on the fluctuations in the financial risk indicators. In addition, the interdependency between the demand reserves function and the type of financial risk indicator also varies across countries’ political conditions. Policy formulation should consider the political risk in modelling optimal reserves-holding since ignoring this factor would understate the cost of holding reserves.
 
Keywords: International reserves, self-insurance motive, country risk
 
BIOGRAPHICAL NOTES
 
Siti Nurazira Mohd Daud is a Senior Lecturer at Universiti Sains Islam Malaysia and Research Fellow at the Institute of Islamic Finance and Wealth Management (IFWMI), Universiti Sains Islam Malaysia. She holds a PhD in Economics from University of Southampton, UK. Her research focuses on international financial economics issues, including external debt and sustainability of external position in developing countries. Her papers have been published in Global Economic Review, Transition Studies Review, Economics Bulletin, International Journal of Business and Management, the Empirical Economics Letters and Journal of Academy of Business and Economics.
 
Abd Halim Ahmad is a Lecturer in finance at his alma mater, the Northern University of Malaysia. His research interests include financial economics, international finance and corporate bankruptcy. He has some publications in international refereed journals namely, Economics Letters, Economics Bulletin, International Journal of Business and Society and International Research Journal of Finance and Economics.
 
INTERNATIONAL RESERVES HOLDING AND THE POLITICAL RISK: EVIDENCE FROM SELECTED EMERGING ECONOMIES
 
ABSTRACT
 
The objective of this paper is to investigate the relationship between financial and economic uncertainty (risk) and the demand for international reserves. In addition, the association between this relationship and the political risk condition is further analyzed for selected emerging economies. By using panels of 20 emerging countries, the empirical results show that the decision by the emerging economies to hold international reserves is largely dependent on the fluctuations in the financial risk indicators. In addition, the interdependency between the demand reserves function and the type of financial risk indicator also varies across countries’ political conditions. Policy formulation should consider the political risk in modelling optimal reserves-holding since ignoring this factor would understate the cost of holding reserves.
 
Keywords: International reserves, self-insurance motive, country risk
 
1.Introduction
The substantial increase in international reserves assets by most of the developing countries in the late 90s and 2000s has been interpreted as a self-insurance motive to protect against anticipated shocks caused by financial and economic uncertainty. As a consequence, taking the impact of the crisis as a ‘valuable lesson’, countries started to pile up stocks of reserves with the aim of reducing the probability of a drastic output plunge in the event of economic crisis and recession. It is crucial to comprehend the underlying factors that may cause countries to accumulate reserves at unprecedented levels. In such a way, the 1997-98 crisis has exposed hidden vulnerabilities among the East Asian countries, thus forcing the market to update the probability of sudden shocks that potentially affect all countries (Aizenman and Marion, 2004).
 
At the other end of the spectrum, demand for international reserves also increases with the effectiveness of international reserves in mitigating the probability of the crisis and decreases with the opportunity cost of reserves (Aizenman et al., 2004). However, the cost of the ‘insurance policy’ is high and also leads to an increase in the probability of not repaying (being in default) the external borrowing. [1] It is notable that holding too many reserves will burden countries, while holding too few reserves will not help a country in the event of sudden shock. However, the rule of thumb of holding reserves equivalent to the value of three months of imports has become obsolete and needs to be revised due to high capital mobility in the emerging economies (Wijnholds and Kapteyn, 2001). Thus, in making a decision on the optimal level of international reserves that a country should hold, the risk factor will play an important role in the decision to hold international reserves since it could be an indicator to measure a country’s economic health as well as any unstable conditions in the economy. [2] It could also act as an alarm and provide an early signal for a country to increase the demand for international reserves. At present, monetary authorities try to account for new risks in the financial environment by resorting to rules of thumb in a broader notion of external cover (Mendoza, 2004). Furthermore, the association of the risk factor and demand for international reserves will provide a signal about which sectors are financially and economically unstable, while initiating some policy recommendations. In addition, it will also point to the issues of whether the financial or economic risk is associated with a high political risk environment and, to a lesser extent, affect the country’s decision to hold international reserves.#p#分頁標題#e#
 
The objective of this paper is to analyze the important factors that are considered during a country’s decision to hold international reserves in the economy with respect to the country’s political environment. The emerging economies which have higher capital mobility and fluctuations in the economy would constitute the best sample for this analysis, suggesting a focus on their decision to satisfy the demand for international reserves. [3] The issue of the high cost of insurance has inspired this paper to investigate empirically the relationship between the effects of political risk and a country’s decision to increase demand for international reserves. In addition, this paper will investigate the types of risk factors - the economic or financial risk indicators - that have an important impact and prompt an increase in reserves accumulation with respect to different political conditions. This paper is structured as follows. Section 2 provides the review of the relevant literature, and Section 3 describes the model and the methodology employed in the study. Section 4 presents the results and Section 5 concludes the paper.
 
2.Literature review
Issues surrounding the motives of countries holding international reserves have evolved over time. From basic monetarist and Keynesian strands to the inventory control approach, the discourse has since been extended to the notion of reserves as a self-insurance policy for a country. From an adequacy approach, Triffin (1947) developed a theory and argued that the demand for reserves could be expected to increase over time with a growth in world trade, specifically transactions in the current account position. Johnson (1965) applied a monetarist balance of payment theory to the liquidity problem and found that international reserves-holding depends on the country’s money supply. In addition, if domestic money supply grows at a lower rate than the domestic demand, the country would accumulate reserves.
 
On the other hand, Heller (1966) conceptualized the idea of reserves demand as an inventory control problem. He used the optimization approach to analyze the demand for international reserves based on a cost-and-benefits analysis. He found that the propensity to import, the opportunity cost of holding international reserves and the stability of a country’s balance of payment account are associated with a country’s decision to hold international reserves. An increase in the propensity to import and the cost of holding international reserves would decrease the level of optimal reserves, while imbalances in the balance of payment position would tend to increase the international reserves-holding. Furthermore, the optimal level of international reserves-holding is given by the amount which minimizes the total cost of adjusting and financing the external imbalances. Meanwhile, Pagan (1968) reformulated the model proposed by Heller (1966) by adapting an inventory theory. However, the two approaches are sufficiently similar to yield an optimal reserves formula, even though the actual reserves level calculation by Pagan’s (1968) formula yields a slightly lower optimal reserves level (Heller, 1968). Frenkel (1981) developed a stochastic model for determining the optimal stock of international reserves. The model emphasizes the important role of stochastic characteristics of external transaction and the forgone earnings with regard to holding reserves.#p#分頁標題#e#
 
While the argument is intuitively clear, there has been considerable discussion on the relationship between the instability (risk) condition and the demand for international reserves (Distayat, 2001; Aizenman and Marion, 2004; Zhou, 2009; and Aizenman et al., 2007).The growing body of literature focusing on the linkages between the risk and the demand for reserves could be interpreted as a convergence towards the motive of holding international reserves as a self-insurance policy. Political instability, corruption and underdevelopment of the domestic capital and financial market are also factors that contribute to a country’s decision on holding international reserves. According to Aizenman and Marion (2004), political instability and corruption reduces the optimal size of buffer stocks. This explains the higher uncertainty in the political condition associated with a higher probability of losing power, thus leading to a reduction in the savings (foreign reserves) in the economy (Alesina and Tabellini, 1990). Meanwhile, Zhou (2009) investigates the empirical relationship between the pattern of fiscal policy and the demand for reserves in developing countries. The results reveal that, in the event of economic downturn, countries with low political risk will increase their international reserves if countercyclical fiscal policies have been implemented. In addition, the demand for reserves depends positively on the ability of international reserves to mitigate the probability of output collapse induced by sovereign partial default (Aizenman et al. 2007). Mendoza (2004) found a high correlation between the reserves level and countries during the post-Asian financial crisis period in 1997, suggesting a departure from past policy stance. On the other hand, Distayat (2001) found that a higher stock of reserves, a healthier state of the economy, and a lower cost of external finance will form a greater strength of commitment. In addition, the foreign reserves are also found to be a good predictor of currency crisis, which relates to the financial risk of the decision to hold reserves. In addition, the substantial increase in international reserves primarily stems from the adjustment, liquidity, and confidence problems of countries in the payment mechanism of the international monetary system (Aizenman and Lee, 2005; Choudhry and Hasan, 2008).However, a recent study by Yeyati (2008) suggests that self-insurance is costly and should be considered a second-best solution in the context of an imperfect international financial market.
 
Meanwhile, there is a vast body of empirical literature that analyzes the determinants of demand for reserves, including Frenkel (1974), Aizenman (2008),Chowdhury and Hassan (2008), Aizenman and Lee (2005), Aizenman et al. (2007),Ramachandran and Srinivaran (2007), and Iyoha (1976). Choudhry and Hasan (2008) found that there is a long-term stationary relationship between level of imports and the average propensity and variability of imports, even with fixed and floating exchange rates. Meanwhile Aizenman (2008) suggests that greater financial integration has increased the demand for international reserves. In addition, the precautionary demands for international reserves are driven by the attempt to reduce the incidence of costly output decline, induced by sudden reversal of short-term capital flows. Aizenman and Lee (2005) also found that trade openness and exposure to financial crisis are important in explaining the variations in reserves-holding. Meanwhile, Korea’s holding of international reserves after the 1999 financial crisis is consistent with the precautionary motive (Aizenman et al., 2007). A study conducted for 29 LDC countries found that expected export receipts, an instability in the export receipt index, degree of openness, return on reserves, and two lagged values of reserves explained over 93 percent of systematic variations in the reserves-holding behaviour (Iyoha, 1976). In addition, Ramachandran and Srinivaran (2007) suggest that volatility of external transactions has a moderate impact on reserves demand in India. [4]#p#分頁標題#e#
 
Model and methodology
This paper has adopted the model proposed by Frenkel (1974) to investigate the factors that potentially explain a country’s decision on the demand for international reserves. The standard model could be expressed as follows:
 
(1)
 
where , ratio of international reserves (minus gold) to Gross Domestic product (GDP). Since developing countries have minimal gold holdings, their international reserves are usually measured as ‘reserves minus gold’ and include convertible foreign exchange, the unconditional drawing right with the IMF, and special drawing rights. S is real GDP per capita, IMP is the average propensity to imports and VAR is the variability in real export receipts. R/GDP measures the international reserves held by the country, S is scaling variable that measure the size of international transaction and IMP as a proxy of adjustment cost. In addition, VAR represents the volatility of international transactions. Furthermore, the relationship between the economic and financial risk and the international reserves-holding is given by
 
(2)
 
In addition, the risk factor has been divided into two types of risk, namely the financial risk and economic risk. is the financial risk factor that is represented by the current account balances to GDP, external debt to GDP and short-term debt to exports of goods and services. Meanwhile measures the economic risk represented by the inflation rate. Aizenman and Marion (2004) explain that the political distortion is associated with a significant reduction in the international reserves-holding. In other words, the international reserves-holding is positively influenced by the political uncertainty. A country with high political distortion could potentially face problems with the allocation and distribution of resources in the economy. In addition, an unstable government condition would create a threat to the investor and international trade, thus leading to a significant decline in international reserves-holding. Meanwhile, Cheung and Sengupta (2011) point out that political instability plays a crucial role in explaining reserves accumulation in Latin American economies.
 
The annual data are collected from various sources: World Development Indicator (WDI) and Global Development Financial (GDF) indicator from the World Bank (WB) database, Datastream by Thomson and IMF/IFS by International Monetary Fund (IMF) from the period 1980 to 2009. This paper also utilizes the data from the political risk scores provided by the International Country Risk Guide (ICRG) to divide the sample based on the political risk points: high- and low-risk groups with respect to various components, namely government stability, socioeconomic conditions and corruption. [5] Due to the unavailability of data on the political risk points, the estimation is based on the January 2010 classification by the ICRG.
 
3.1 Pooled Mean Group Estimation#p#分頁標題#e#
 
This paper employs the Pooled Mean Group (PMG) estimation technique for dynamic panel data by Pesaran et al. (1999). The maximum likelihood estimation of the parameter represents an intermediate case between the Mean Group (MG) and the traditional pooled estimation technique (fixed and random effects). The MG estimation averages coefficients to obtain means of the parameter estimates. The traditional pooled estimator such as Fixed and Random effect estimator allowed only the intercept to differ across group while all other coefficients and error variances are constrained to be the same (homogeneity).
 
PMG estimation, which involves pooling and averaging, constrained the long-run coefficient to be the same across countries. Besides that, the intercept, short-run coefficient as well as error variances are allowed to differ. One advantage of the PMG estimators over the traditional Dynamic Fixed Effect (DFE thereafter) model is that they can allow the short-run dynamic specification to differ from one country to another. Based on the basic Autoregressive Distributed Lag (ARDL) (p, q1, q2,…qn) model
 
where (k x 1) is the vector of explanatory variables for group i, represent the fixed effects, the coefficient of the lagged dependent variables, are scalars, and are (k x 1) coefficient vectors. Written in error correction form, the specification for the PMG estimators takes the following form:
 
where is the long-run parameter and.is the error correction parameter which explains the speed of adjustment of the estimated model to converge back to equilibrium if there are shocks. In addition, for small T, the estimator will be subject to the familiar downward bias in the coefficient of the lagged dependent variable (Pesaran et al., 1999). Furthermore, the PMG estimator could also be computed irrespective of whether the regressors are I(0) or I(1) variable.
 
Empirical results
Table 1 presents the long-run relationship between the determinants of countries’ decisions to demand international reserves in the emerging economies. By following the general-to-specific approach, the model is estimated in three equations. The error correction term is statistically negative (at 5 percent significance level) to reject the null of no cointegration, suggesting the existence of a long-run relationship for all estimated models. In addition, the adjustment coefficient (error correction term) shows a moderate phase of speed of convergence to equilibrium with values ranging from 28.3 percent to 32.3 percent, indicating that a country takes about 28.3 to 32.3 percent speed of adjustment to equilibrium in the event of shock. [6] In addition, the likelihood ratio test statistics reveal a rejection of the null of no equal long-run parameters across countries, suggesting that the long-run coefficients do not differ across countries and implying that there is long-run homogeneity among the countries in the sample. [Insert Table 1]#p#分頁標題#e#
 
The results reveal that the IMP, CA and INFL variables are significant at 5 percent significance level for all estimated equations. In particular, the IMP shows a significant negative effect on the increase in international reserves-holding. This is because most of the country’s foreign exchange is counted as international reserves and thus flows in the opposite direction (Huang, 1995).Meanwhile the CA, which represents the financial risk factor, is found to have a positive relationship with the demand for international reserves, indicating that a country accumulates reserves during the period of surplus position. Additionally, in model 1 an increase in ED that also signifies the financial risk indicator and is associated with an increase in international reserves thus highlighted the possible linkages between high levels of external indebtedness to the uncertain condition of the country where it could possibly default. On the other hand, the INFL variable which is a proxy for the economic risk has a positive and significant (at 5 percent significance level) effect on the demand for reserves function. The effect of INFL is consistently higher than the CA in all estimations, implying that the INFL is the most important factor in determining the country’s decision to hold international reserves. In addition, there is evidence to suggest that the emerging countries experienced economies of scale with the positive and significant effect of the VAR variable at 5 percent significance level. This results found in this paper are in line with the findings of Bahmani-Oskooee and Niroomand (1988) for the developed and less-developed countries’ reserves demand function.
 
Table 2 shows the country-specific estimates on the demand for international reserves function. It is notable that, in the previous literature, a country with flexible exchange rate would have faster speed adjustment to the equilibrium (Frenkel, 1979; Edward, 1983). The results show that the speed of adjustment for China, Mexico and the Philippines is very fast while Jordan has the slowest speed of adjustment. [7] While China, Mexico and the Philippines have experienced various exchange rate regimes throughout the period, the fear of returning to the pegged-exchange rate regime reflects the countries’ behaviour towards international reserves accumulation, thus explaining the very fast speed of adjustment towards equilibrium in the event of shock. A strong and sufficient reserves-holding to sustain the dinar peg and to deal with the most extreme capital account disruptions (Chami et al., 2007) could possibly explain the slow speed of adjustment found for Jordan. [Insert Table 2]
 
To investigate the impact of political risk environment on the financial and economic risk as well as a country’s decision to hold international reserves, this paper performs the analysis with political risk categorized into three sub-categories, namely government stability, socioeconomic conditions and corruption, while the sample is divided into high-risk groups and low-risk groups accordingly. [8] The results are reported in Table 3. The results show that the high-risk group of government stability and socioeconomic component has a faster speed of adjustment with the ECT amount of about 0.782 and 0.780 respectively as compared to the low-risk group. This indicates that governments in the high political risk condition are aware and take immediate action to deal with any sudden shock in the economy. In addition, the relatively fast speed of adjustment also indicates that reserves management has been fairly active, with an average 78 percent deviation from the equilibrium.#p#分頁標題#e#
 
Focusing on government stability and socioeconomic political position, either high-risk or low-risk, the VAR, CA, INFL and STD are found to have a significant impact on the demand for international reserves at 5 percent significance level. In other words, the results imply that the fluctuation in demand for international reserves is highly dependent on the variability of the real export receipt, current account, inflation rate and short-term debt. Furthermore, in the environment of high risk of government instability which explains the government cohesion, legislative strength and popular support show that the country’s decision to hold international reserves depends largely on the INFL and STD. Moreover, the financial risk indicator which is represented by the STD is the most important indicator since it has the highest impact on a country’s decision to hold reserves, as compared to the other risk indicators. Thus it provides clear support that, in the high risk of government instability environment, the decision to hold reserves is sensitively reflected by the country’s short-term debt liability.
 
In the high-risk group of the socioeconomic condition, the VAR, CA, ED, DS, INFL and STD are found to have an impact on the country’s decision to hold international reserves. Besides that, it can be noted that all financial risk indicators have a significant impact on the fluctuation in the international reserves assets held by the country. Despite the positive effect of CA, ED, INFL and STD on the international reserves-holding, the increase in the debt service will lower the holding of international reserves since it is associated with a reduction of the probability of default on the external borrowing. [Insert Table 3]
 
In the era of high capital mobility, it is certain that the movement of capital will become the most important indicator, such as the ED (stock of external indebtedness). In addition, the results also reveal that, in the high risk of socioeconomic condition, the external debt has a huge impact on the decision to hold reserves, with a coefficient value of 0.35.
 
Meanwhile, the high-risk group in the corruption index shows a significant impact of IMP, CA, INFL and STD on the country’s decision to demand international reserves as shown in Table 4. Of the financial and economic risk indicators, the financial risk, which is represented by the STD, has a larger impact than the other risk factor. Intuitively, the results indicate that a country with a high level of corruption is closely linked to the high mobility of capital within the international capital market, thus suggesting the importance of considering STD in a country’s decision to increase its international reserves. Meanwhile, the speed of adjustment is found to be slow in the event of shocks in the economy, implying that governments with a high level of corruption will not operate the economy effectively. [Insert Table 4]
 #p#分頁標題#e#
Conclusion
The objective of this paper is to investigate the relationship between the financial and economic risk factors and the demand for international reserves for selected emerging economies. In addition, the association between this relationship and the political risk condition is further analyzed. The empirical results show that the decision to hold international reserves by the emerging economies is largely dependent on the fluctuation of the financial risk indicator. However, a country’s decision to hold international reserves will depend on different financial risk indicators and it is subject to the country’s political condition. Furthermore, in the high-risk political environment, the stocks of external indebtedness and short-term debt position are the main important factors that lead to a prompt increase in international reserves-holding.
 
Furthermore, the capital mobility issues that are related to the ‘hot money’ movement and being in default on its external borrowings would increase the fear of any sudden shock and being excluded from the international capital market. As such, this development would result in an unprecedented increase in international reserves-holding by some of the emerging economies. This indicates that the financial sector of the emerging economies is in an unstable position and suggests the necessity of some policy formulation on minimizing the fluctuations in the international financial sector. At the other end of the spectrum, given the findings of this paper, the political factors are also important and should be considered when modelling the optimal level of international reserves-holding for the emerging economies. Ignoring this factor would potentially understate the cost of holding reserves, thus leading to an underestimation of the optimal level of reserves that a country should hold. Furthermore, since the degree of diversification on exports and integration with the international financial market varies across the emerging countries, a country’s specific factors should be taken into consideration when estimating the optimal level of international reserves-holding. However, although this paper has focused on the issue of holding international reserves per se, a sound macroeconomics and prudent policy formulation should be considered by the policy-maker towards the objectives of building a comprehensive, robust and resilient international financial system and a sustainable external sector position.