Česká národní banka

CNB > Economic research > Research publications > CNB Working paper series > 2014 > International Reserves: Facing Model Uncertainty

International Reserves: Facing Model Uncertainty

Soňa Benecká, Luboš Komárek

The abundant literature on the competing motives for holding international reserves stresses different factors, giving rise to a problem called model uncertainty. In this paper we search for the most important determinants of reserve holdings using data for 104 countries in 1999–2010 and evaluate their importance using Bayesian model averaging (BMA). We enrich the ongoing empirical discussion by examining the role of financial globalization and monetary policy and by introducing new variables and searching for alternatives to the traditional ones. The results confirm that trade openness and the broad-money-to-GDP ratio are the key determinants with a positive link to the level of reserves. On the other hand, financial development seems to lower the need for reserves.

JEL codes: C23, E58, F41

Keywords: Bayesian model averaging, determinants, international reserves

Issued: March 2014

Download: CNB WP 3/2014 (pdf, 339 kB)