Reserve Adequacy in Asia Revisited: New Benchmarks Based on the Size and Composition of Capital Flows

Abstract

There has been considerable debate about the rationale behind the reserve hoarding by Asia, with wide ranging explanations has been offered for this behavior. In view of the ferocity and suddenness of the Asian crisis of 1997-98, the precautionary motive no doubt looms large in the decision to build up reserves to unprecedently high levels. This paper deals more narrowly with the issues of additive coverage ratios that some of the central banks are using and presenting new benchmarks for judging reserve adequacy based on the behavior of different types of capital flows during currency crises. Alternative measures of the i?½i?½sizei?½i?½ of recent crises and their implications for levels of reserve adequacy for a number of Asian countries today are also considered.

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