International reserves and growth: assessing the mercantilist motive in Latin America

Official reserves have increased to unprecedented levels since the mid-1990s, particularly in developing economies. One of the reasons ascribed for accumulating official reserves is the so-called mercantilist motive. This motive is seen as a part of an active industrial policy in the sense that these resources allow the monetary authorities to maintain a stable and undervalued real exchange rate, promoting economic growth and development via the tradable goods sector. In this paper we attempt to assess this motive using data for ten selected Latin American economies during the period 1996–2011. Unlike most previous work done on this topic, we consider official reserves as one of the determinants of the real exchange rate. Our econometric findings indicate that international reserves in the region appreciate the real exchange rate. This result suggests that the strategy of hoarding reserves in Latin America has not promoted economic growth and development.