We study the joint behavior of external debt, international reserves, and real interest rates based on a dynamic regime-switching small open economy model incorporating salient features of economic crises in emerging markets. Unlike reduced form analyses where contributions from different channels are difficult to determine, our framework allows separately assessing the two possible motives behind reserve accumulation: mercantilistic behavior and precautionary savings. Using data from 20 emerging countries for 50 years, we show that both motives matter to differing degrees in these countries. Reserves serve as an instrument to sustain higher levels of output and insure against disruptions from crises. The model is quantitatively successful at matching various aspects of the data that exhibit substantial variation across these countries. Our findings also explain why many countries choose to hold debt-financed reserves, as we show that reserves lower the finance premium faster than debt increases it, up to a finite level.