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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Do oil endowment and productivity matter for accumulation of international reserves?
Rasmus Fatum
Guozhong Zhu
Wenjie Hui
Abstract

We develop a dynamic stochastic optimization model with oil price shocks to show that countries with certain combinations of oil endowment and productivity have strong precautionary incentives to accumulate foreign reserves in response to oil price shocks. Using the Simulated Method of Moments to estimate the model we demonstrate how oil price shocks are absorbed by changes in foreign reserves which, in turn, leads to less variation in aggregate consumption. Along with productivity and oil endowment, we also consider as determinants of reserves holding conventional variables such as trade- to-GDP ratio and capital openness. Overall, our results suggest that productivity and oil endowment are potentially important determinants of foreign reserves that for some countries should be considered as complements to conventional determinants.


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Rasmus Fatum & Guozhong Zhu & Wenjie Hui, Do oil endowment and productivity matter for accumulation of international reserves?, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 291, 01 Dec 2016.
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Keywords: foreign reserves; oil price shocks; precautionary demand
DOI: 10.24149/gwp291
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