Insuring against shocks The drivers of international reserve accumulation in emerging economies were originally related purely to crisis-insurance motives, in the context of widespread pegging to the US dollar. In the wake of the financial crises of the late 1990s, when their official reserves were quickly depleted, emerging economies rapidly rebuilt their foreign assets in order to stave off further speculative attacks, and be able to better absorb the shocks of sudden stops in capital inflows. These countries were understandably eager to protect themselves from the dire macroeconomic consequences of crises like the one they had just experienced. Such self-insurance was also meant to limit future dependence on a bail-out from the international community. Even for countries that were not directly affected by the crisis, these motives probably played a central role, to the extent that some degree of capital account liberalisation may already have been foreseen at the time. Over the years, however, the persistence of large trade and current account surpluses has resulted in an unprecedented accumulation of official reserves. A deterrent against speculative attacks One approach that has also been contemplated by the literature is to acknowledge that, to some extent, the probability of a speculative attack may be substantially lowered by the reserve accumulation policy. As a matter of fact, the very limited impact of recent financial turbulence on emerging market currencies may to some extent vindicate the precautionary benefits of reserve assets.

Of course, one could argue that central banks are doing their job in taking over foreign exchange positions: naturally, holding foreign assets would expose private agents to currency risk exposure, and in that respect the public holding of foreign assets may be seen as relieving domestic agents from that risk. However, this reasoning raises two objections: -  as taxpayers, domestic private agents are still indirectly exposed to the realisation of the large currency risk that public managers of foreign assets bear, which entails fiscal costs;  -  if the capital account regime had not resulted in the public sector management of these savings in the form of foreign assets, in principle, corporates (and possibly households) would have directly invested their savings in financial instruments of their choice abroad. More realistically, they would probably have unwound their currency exposures and saved in domestic assets. In the absence of official intervention, the exchange rate would have adjusted. However, the fact remains that foreign reserve holdings belong to the nation that has accumulated these assets, hence indirectly to private domestic agents (admittedly including future generations). The public intermediation of these savings naturally leads us to the question of the appropriate manner in which to manage such large holdings. The management of international reserves The facts High current account surpluses mechanically reflect an excess of domestic (private or public) savings, which must be invested abroad. But in East Asia and commodity-exporting countries, these accumulated excess savings appear to be largely held by sovereigns.