Financial versus monetary mercantilism: Long-run view of large international reserves hoarding

Joshua Aizenman, Jaewoo Lee

Research output: Contribution to journalArticlepeer-review

87 Scopus citations

Abstract

The sizeable hoarding of international reserves by several East Asian countries has been frequently attributed to a modern version of monetary mercantilism - hoarding international reserves in order to improve competitiveness. From a long-run perspective, manufacturing exporters in East Asia adopted 'financial' mercantilism - subsidising the cost of capital - during decades of high growth. They switched to hoarding large international reserves when growth faltered, making it harder to disentangle the monetary mercantilism from the precautionary response to the heritage of past financial mercantilism. Monetary mercantilism also lowers the cost of hoarding, but may be associated with negative externalities leading to competitive hoarding. From this viewpoint, this paper makes three observations on the East Asian reserve accumulation. First, the recent large hoarding of reserves in Japan and Korea occurred in the aftermath of the growth strategy that combined export promotion and credit subsidisation (financial mercantilism). Second, whether the ultimate motive is mercantilist or precautionary, the ongoing reserve hoarding in Asia contains an element of competitive hoarding, which is likely to have negative externalities among countries involved. Finally, China's hoarding of reserves partly reflects the precaution against the financial fragility that is likely to follow the slowing of economic growth.

Original languageEnglish
Pages (from-to)593-611
Number of pages19
JournalWorld Economy
Volume31
Issue number5
DOIs
StatePublished - 1 May 2008
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

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