According to the mercantilist view, reserves are accumulated to promote export-led economic growth. As per this approach, economies undervalue their currencies using reserves to support exports.
In the precautionary motive of holding reserves, countries maintain a reserve buffer to avoid output and consumption losses during 'sudden stops' of capital flows.
The article noted that reserves are found to be helping EMEs in curbing volatility of exchange rates, as evident from the negative relationship between exchange rate volatility and reserve cover of imports. An increase in reserves reduces the probability of a currency crisis, thereby implying a positive externality of holding reserves, it added.
