A Study Of Developing Economies' Foreign Exchange Reserve By Introducing Exogenous Framework

The growth of foreign exchange reserves in developing countries had been reversed simultaneously since 2014 and China became the center of attention.The worries of the excess foreign exchange reserves have quickly turned into a problem of shortage,but the existing research framework is difficult to explain this dramatic change.In context of the dilemma of foreign exchange reserves in developing economies,the framework of foreign exchange reserve study should be expended accordingly.We then combed the current framework of foreign exchange reserves both from the academic circles and the IMF surveillance.We found that a common feature of these studies were to understand the causes of foreign exchange reserves to serve the economy development as endogenous demand requirements,in fact,can be summed up as the endogenous demand theory.However,when we make a descriptive statistics on the level of foreign exchange reserves in developing economies,we find that there is a departure from the demand theory and change of foreign exchange reserves should be.We find that the developing economies accumulating foreign exchange reserves mainly through debt,thus the accumulation of foreign exchange reserves is not "demand determined",but exogenous factors does.Therefore,we believe that the exogenous factors should be introduced into the existing research framework.We discussed the influence mechanism of exogenous factors on foreign exchange reserves of developing economies theoretically,and then introduce exogenous factors into empirical models.Fixed effects panel regression results of 96 global developing economies show that the global exogenous factor we seek--the Federal funds effective rate,and the explanatory variable,the level of foreign reserves was negatively correlated,which accord with our theoretical analysis.This means that the growth of foreign exchange reserves of developing economies are affected by exogenous factors,when the Fed's loose monetary policy,it will heat the growth of foreign exchange reserves,and when the fed tighten their monetary policy the level of foreign exchange reserves will decline.Because of the Fed's monetary policy is not affected by the "peripheral",the conflict may exist between the objective function of peripheral economies of the demand of foreign exchange reserve and the Federal Reserve,which leads to the demand of foreign exchange reserve cannot be met.This is a reasonable explanation for the development of foreign exchange reserves management dilemma.In addition,our empirical results also show that there are differences in foreign exchange reserves in different regions.Regions accumulating foreign exchange reserves mainly in the form of assets,are suffering less exogenous problem than those regions which accumulated foreign exchange reserves mainly in the form of liabilities.After we prove the existence of exogenous factors in an empirical way,we further examine the issue of foreign exchange reserves in a historical view of international monetary system.We find that in a balance international monetary system,there is no exogenous problem of foreign exchange reserve,but the asymmetrical international monetary system does.And in the absence of rule and management of the current international monetary system,foreign exchange reserves exogenous problem increasingly protruding,the "center's" "Triffin Dilemma" has completely evolved into the "periphery's" "New Triffin dilemma".In this regard,we introduce the adjustment of financial channels into the analysis of external imbalances,through an empirical approach to examine the role of foreign exchange reserves in the asymmetric International Monetary system.In order to analyze how exogenous factor effect the behavior of foreign exchange reserves in different regions,we choose countries from Asia,which we believe exogenous problem is weaker,and countries from Latin America,which we believe exogenous problem is exogenous strong,to analysis behavior of two groups' foreign exchange reserves with help of panel VAR.The empirical results show that there are significant differences between the two groups.Exogenous weakened the function of foreign exchange reserves to cover external shocks.We examine the problem of the foreign exchange reserve of China separately.First,we examine the characteristics of exogenous cycle and foreign exchange reserve growth in China from 1980 to 2014.Then,we summarize the consequences of exogenous cycles leading to over hoarding foreign exchange reserves.Finally,we discuss the characteristics of the reverse point of foreign exchange reserves and the new issues of foreign exchange reserve management in China from 2015 to now.Finally,according to the conclusion,we propose a set of policy suggestions.The main innovations of this paper include:First,exogenous factors will have a significant impact on the holding behavior of foreign exchange reserves.The result of global exogenous factors——the federal benchmark interest rate regression coefficient shows,when the federal benchmark interest rate rises,developing economies foreign exchange reserves will be reduced,on the other hand,when the federal benchmark interest rates decline,the foreign exchange reserves hold by developing economies will increase.The main reason is that the developing economies accumulating foreign exchange reserves are mainly increasing liability,thus the degree of difficulty of obtaining foreign exchange reserves for developing economies are effected by and the "center" economy's monetary policy.Second,the objective function of the exogenous factors decided by "center"economy may not always consistent with developing economies',so the exogenous factors may not satisfy the demand of foreign exchange reserves by developing ones.This means that exogenous shocks may weaken the ability of foreign exchange reserves to cover shocks as in the framework of demand.Third,through regional comparison we found that different regions of the foreign exchange reserve behavior are different,the effects of exogenous factors are more susceptible to those developing economies which accumulats foreign exchange reserves by be in more debt.So the foreign exchange reserve managers should not only pay attention to the amount of foreign exchange reserves,but should pay more attention to the quality analysis of foreign exchange reserves.This provides a new way to study the appropriate scale of foreign exchange reserves and improve the management level of foreign exchange reserves.Fourth,our research has contributed to the issue——"excess reserves of foreign exchange".On the one hand,the results of our empirical research support the theory of "floating fear",”loss aversion" and "comparison motivation",which can explain the excess foreign exchange reserves in developing economies.On the other hand,we believe that exogenous factors can also lead to excess foreign exchange reserves in developing economies.The reason is that the spillover effect of the monetary policy easing in the center of the economy may lead to the growth of foreign exchange reserves of the developing economies in the region simultaneously.Fifth,in the full sample regression grouping by region we found that,in the context of high capital flow,when exchange market pressure is rising,developing economies more dependent on markets intervention,rather than relying on the self adjustment of the market compared with developed ones.Therefore,the expansion of exchange rate flexibility will not reduce,but will increase the consumption of foreign exchange reserves.This provides a new inspiration for foreign exchange reserves management,and provides a new policy ideas for the exchange rate regime.