International reserves and trilemma policy convergence in Malaysia

Abstract

Some observations have suggested that international reserves contribute to trilemma policy convergence in emerging countries. Nonetheless, this hypothesis needs more solid empirical evidence to determine its validity. This article tests this hypothesis by examining the relationships among the index of policy dispersion, international reserves and trade openness in a threshold model in Malaysia. As a small open economy, Malaysia has accumulated a relatively large amount of international reserves since the mid-1990s. The results indicate that the positive impact of international reserves on reducing policy dispersion or achieving policy convergence is found only if the international reserves are above a threshold. Hence, this conclusion supports the need to hold a relatively high level of international reserves in Malaysia.