Abstract
Since 2002, official reserves in Asia have grown at an unprecedented scale, mainly as a by-product of official efforts to resist currency appreciation. Apart from the external adjustment and international political repercussions, critics have also warned of the "perils", or unintended domestic consequences, of countering capital inflows with sterilised intervention. These warnings in the Calvo (1991) tradition are well known and frequently invoked, but to what extent have the risks cited actually materialised in Asia? This paper examines the domestic consequences in three main areas: monetary control, financial stability and central bank profitability and balance sheet risk. We find that, so far, the evidence has not been as strong or widespread as often presumed. With the exception of India, where a number of archetypal symptoms have emerged, other large reserve accumulators have not exhibited conclusive signs of difficulties. We argue that many of the assumptions underlying the Calvo-type warnings did not apply broadly to Asia. Indeed, rather than being an independent policy with consequences, we find that the large-scale reserve accumulation in Asia might be better seen as a consequence of the weakness of investment relative to savings in this decade.