This paper examines the interaction between capital flows and international reserve
holdings in the context of increasing financial integration. For emerging markets
the sensitivity of reserves to net capital flows was negative in the 1980s, but became
positive after the Asian crisis when these countries used net capital flows to build
up reserves. For advanced countries, net capital flows had a negative effect on reserves,
especially in recent years. Using measures of financial globalization, we also provide
evidence that the sensitivity of reserves to net capital flows increased with globalization
for emerging markets while it decreased for advanced countries.