FX Reserves as Insurance Policy

Editor's Note: Brian Hoyt is a consultant in the Financial and Private Sector Development Vice Presidency of the World Bank Group.

A new report from Deutsche Bank on emerging market economies' anti-crisis measures highlights the benefits of FX accumulation. The top performers as identified by the report share one obvious commonality: massive dollar reserves. Nearly every country that has successfully weathered the crisis is either a petrostate and/or has a significant sovereign wealth fund. Not only have FX reserves been key in facilitating an economic stimulus, they have also have provided significant currency stability:

The amount of FX reserves in relation to external financing requirements is still crucial to the assessment of countries’ resilience to external shocks. From a policy perspective, accumulating FX reserves still seems to be pretty good insurance.

This observation seems to contradict concerns that central banks will be hesitant to accumulate further dollar reserves. The question remains as to how central banks' desire to purchase this kind of insurance can be squared with the need to resolve global macroeconomic imbalances.