International reserves as a mirror of external effects and macroeconomic policies

The article sets out to document the motives that have led central banks (especially inflation targeters) to accumulate international reserves over the last two decades. We start by outlining contemporary theories on the adequate level of international reserves, a topic the economic literature has been addressing since around the second half of the 1960s. We then present evidence of a sharp absolute increase in international reserves around the world and rank the central banks with the highest reserve levels. This ranking changes significantly depending on the ratio selected (reserves are most often expressed as a ratio to GDP, exports, M2 or short-term external debt). We also test the hypothesis that there is a concave relationship between the reserves-to-GDP ratio and economic development as measured by GDP per capita. The article goes on to discuss the various motives that have led to the accumulation of international reserves, most notably external effects (especially in emerging economies) and macroeconomic policies (particularly unconventional ones) in developed countries. We also pay greater attention to the current debate about the level of international reserves and the sensitivity of an economy to changes in the Federal Reserve’s monetary policy. In several places in the text, we look more closely at the specific case of the Czech Republic, where unconventional monetary policy led to strong growth in international reserves.