Precautionary Reserves: An Application to Bolivia

26 Pages Posted: 8 Mar 2010

See all articles by Fabián Valencia

Fabián Valencia

International Monetary Fund (IMF)

Date Written: March 2010

Abstract

Using precautionary savings models we compute levels of optimal reserves for Bolivia. Because of Bolivia's reliance on commodity exports and little integration with capital markets, we focus on current account shocks as the key balance of payments risk. These models generate an optimal level of net foreign assets ranging from 29 to 37 percent of GDP. For comparison purposes, we contrasted these results with standard rule of thumb measures of reserve adequacy, which in the case of Bolivia resulted in substantially lower levels of adequate reserves. These differing results emphasize the need to appropriately account for country-specific risks in order to derive adequate measures of reserve buffers.

Suggested Citation

Valencia, Fabian V., Precautionary Reserves: An Application to Bolivia (March 2010). IMF Working Papers, Vol. , pp. 1-25, 2010. Available at SSRN: https://ssrn.com/abstract=1565228

Fabian V. Valencia (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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