Article2011

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

454 citations0/0 files storedThe Economic Journal

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic Theory and Policy

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.

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References

2007The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004 2004The Modern History of Exchange Rate Arrangements: A Reinterpretation 2007Making Globalization Work 2006The Theory of Corporate Finance 2006The Theory of Corporate Finance 2002Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks 2006The External Wealth of Nations Mark Ii: Revised and Extended Estimates of Foreign Assets and Liabilities,1970-2004 2004Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks

Cited by

2012Financial crises and macro-prudential policies 2014External Adjustment, Global Imbalances, Valuation Effects 2012International reserves and the global financial crisis 2018International Reserves and Rollover Risk 2012Two Targets, Two Instruments 2016Undervaluation through foreign reserve accumulation: Static losses, dynamic gains,2021

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