The Optimal Level of International Reserves for Emerging Market Countries: A New Formula and Some Applications

26 Pages Posted: 21 Sep 2011

See all articles by Olivier Jeanne

Olivier Jeanne

Johns Hopkins University - Department of Economics

Romain G. Rancière

University of Southern California

Date Written: September 2011

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. The buildup of reserves in emerging market Asia can be explained only if one assumes a large anticipated output cost of sudden stops and a high level of risk aversion.

Suggested Citation

Jeanne, Olivier and Rancière, Romain G., The Optimal Level of International Reserves for Emerging Market Countries: A New Formula and Some Applications (September 2011). The Economic Journal, Vol. 121, Issue 555, pp. 905-930, 2011. Available at SSRN: https://ssrn.com/abstract=1931359 or http://dx.doi.org/10.1111/j.1468-0297.2011.02435.x

Olivier Jeanne

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Romain G. Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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