Defending an Emerging Economy from Global Financial Turbulences

The purpose of this article is to go back to basics of the international balance of payments to take a closer look at the roles of international reserves and related factors in the exchange rate managements of an emerging economy. It is a timely attempt because; (1) international reserves are playing a crisis resolution role at least in the practical terms. (2) liquidity changes from external factors are particularly important since the US quantitative easing during the Great Recession. (3) central banks’ balance sheets have expanded in emerging economies since the post-Asian Crisis period. We extend the model from Turnovsky(1985) to capture the international monetary aspects of emerging economies. Emerging economies with international reserves and their own sterilization measures are found to be able to partially offset external factors.