The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications

By Romain Rancière, Olivier Jeanne. Social Science Research Network, 2006

289 citations recorded by the source corpus.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. We present a model of the optimal level of international reserves for a small open economy that is vulnerable to sudden stops in capital flows. Reserves allow the country to smooth domestic absorption in response to sudden stops, but yield a lower return than the interest rate on the country’s long-term debt. 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 buildup of reserves in Asia seems in excess of what would be implied by an insurance motive against sudden stops. JEL Classification Numbers: F32

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7a445bae44079006c296b00f2839472a7842b22a

Citations in the corpus

• A Framework for Assessing Global Imbalances (2008, unknown): “Jeanne and Ranciere (2006) argue that reserves have been accumulated as an insurance against the risk of balance-of-payments crises, which came to be perceived as higher after the 1997-98 SouthEast Asian crises.”
• Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? (2017, unknown): “…across a wide variety of topics, for example Aghion et al (2009) and Rajan and Subramanian (2005) on growth, Aizenman and Lee (2007) and Jeanne and Ranciere (2006) on reserve accumulation, Chinn and Wei (2013) and Ghosh et al (2013) on current account adjustment, Hau and Rey (2006) on…”