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Foreign Reserve Adequacy in Sub-Saharan Africa

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  • International Monetary Fund

Abstract

This paper looks at the question of adequacy of reserves in sub-Saharan African countries in light of the shocks faced by these countries. Literature on optimal reserves so far has not paid attention to the particular shocks facing low-income countries. We use a two-good endowment economy model facing terms of trade and aid shocks to derive the optimal level of reserves by comparing the cost of holding reserves with their benefits as an insurance against a shock. We find that the optimal level of reserves depends upon the size of these shocks, their probability, and the output cost associated with them,

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/150.

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Length: 36
Date of creation: 01 Jun 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/150

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Keywords: Foreign exchange reserves; Reserves adequacy; Regional shocks; terms of trade; terms of trade shock; trade shock; tradable goods; terms of trade shocks; reserve holdings; open economy; trade shocks; short-term debt; balance of payments; output growth; foreign exchange; balance of payments crises; relative price; oil revenues; open economies; exporting countries; oil exporters; terms of trade ? shock; domestic demand; terms-of-trade shocks; external shocks; exchange rate policies; domestic consumption; elasticity of substitution; exchange rate regime; vulnerability to shocks; domestic economy; money supply; current account deficit; aggregate consumption; trade ? shock; external financing; constant elasticity of substitution;

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References

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  1. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, Elsevier, vol. 33(3-4), pages 345-362, November.
  2. Joshua Aizenman & Nancy P. Marion, 2002. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," NBER Working Papers 9154, National Bureau of Economic Research, Inc.
  3. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
  4. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(4), pages 99-118, Fall.
  5. Joshua Aizenman & Yeonho Lee & Yeongseop Rhee, 2004. "International Reserves Management and Capital Mobility in a Volatile World: Policy Considerations and a Case Study of Korea," NBER Working Papers 10534, National Bureau of Economic Research, Inc.
  6. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt44g3n2j8, Center for International Economics, UC Santa Cruz.
  7. Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," Open Economies Review, Springer, Springer, vol. 12(4), pages 423-434, October.
  8. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile, Central Bank of Chile 299, Central Bank of Chile.
  9. M. Nowak & Ketil Hviding & Luca Antonio Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 04/189, International Monetary Fund.
  10. Caramazza, Francesco & Ricci, Luca & Salgado, Ranil, 2004. "International financial contagion in currency crises," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(1), pages 51-70, February.
  11. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(362), pages 507-14, June.
  12. Anubha Dhasmana, 2008. "Welfare Gains of Aid Indexation in Small Open Economies," IMF Working Papers 08/101, International Monetary Fund.
  13. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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Cited by:
  1. International Monetary Fund, 2012. "International Reserves in Low Income Countries," IMF Working Papers 12/7, International Monetary Fund.
  2. Wendell A. Samuel & Emilio Pineda & Mario Dehesa, 2009. "Optimal Reserves in the Eastern Caribbean Currency Union," IMF Working Papers 09/77, International Monetary Fund.
  3. Era Dabla-Norris & Jun Il Kim & Kazuko Shirono, 2011. "Optimal Precautionary Reserves for Low-Income Countries," IMF Working Papers 11/249, International Monetary Fund.

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