Hoarding of International Reserves: Mrs Machlup's Wardrobe and the Joneses

Motivated by the observed international reserve hoarding behavior in the post‐1997 crisis period, we explore the Mrs Machlup's Wardrobe hypothesis and the related keeping up with the Joneses argument. It is conceived that, in addition to psychological reasons, holding a relatively high level of international reserves reduces the vulnerability to speculative attacks and promotes growth. A stylized model is constructed to illustrate this type of hoarding behavior. The relevance of the keeping up with the Joneses effect is examined using a few plausible empirical specifications and data from 10 East Asian economies. Panel‐based regression results are suggestive of the presence of the Joneses effect, especially in the post‐1997 crisis period.