The Optimal Level of International Reserves for Emerging Market Countries: A New Formula and Some Applications
46 Pages Posted: 11 Jun 2008
Date Written: February 2008
Abstract
We present a model of the optimal level of international reserves for a small open economy seeking insurance against sudden stops in capital flows. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent build-up of reserves in emerging market Asia seems in excess of what would be implied by an insurance motive against sudden stops.
Keywords: balance-of-payments crises, International Reserves, Sudden Stops
JEL Classification: F32
Suggested Citation: Suggested Citation
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