The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'?

We explain the size of international reserve depletion during the global crisis, where only about half of the EMs drew down their reserves as part of the adjustment mechanism. Countries that internalized their large exposure to trade shocks before the crisis, used their IR as a buffer stock in the first phase of the crisis. After a rapid initial depletion of reverses, they reached a markedly declining rate of IR depletion, losing not more than one-third of their pre-crisis IR. The adjustment of EMs was constrained more by their fear of losing reserves than by their fear of floating.