Asian central banks react more strongly to currency appreciations than depreciations and more to nominal effective exchange rates (NEERs) than to bilateral US dollar rates. This rationalizes the relative exchange rate stability and the sustained reserve accumulation in the region.

An old yet rarely explored motive of hoarding international reserves advanced by Machlup (1966) is examined. Reserve accumulation behavior in Asia is driven by a psychological desire to keep up with neighboring countries, i.e., 'keeping up with the Joneses effect'.