Net Capital Flows, Financial Integration, and International Reserve Holdings: The Recent Experience of Emerging Markets and Advanced Economies

The paper examines the link between net capital flows and international reserves emphasizing the external financing of reserve accumulation in the context of increasing international financial integration. The paper finds that the effect of net capital flows on reserve accumulation has shifted from negative to positive for emerging markets but not for advanced countries. The empirical results suggest that in recent years emerging markets, with concerns about sudden stops in capital flows, have rapidly built up reserves through external financing with net capital inflows, whereas the advanced countries, with more secure access to international finance, have balanced reserves accumulation with investments in higher-yielding foreign assets. IMF Staff Papers (2009) 56, 516–540. doi:10.1057/imfsp.2008.35; published online 17 February 2009