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Foreign Reserve Adequacy in sub-Saharan Africa

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Author Info
Anubha Dhasmana
Paulo Flavio Nacif Drummond

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

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Length: 36 pages
Date of creation: 18 Jun 2008
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Handle: RePEc:imf:imfwpa:08/150

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Keywords: Working Paper ; Sub-Saharan Africa ; Reserves adequacy ; Foreign exchange reserves ; Balance of payments ; Terms of trade ; Regional shocks ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
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  2. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, 07. [Downloadable!] (restricted)
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  3. Ketil Hviding & M. Nowak & Luca Antonio Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 04/189, International Monetary Fund. [Downloadable!]
  4. Caramazza, Francesco & Ricci, Luca & Salgado, Ranil, 2004. "International financial contagion in currency crises," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 51-70, February. [Downloadable!] (restricted)
  5. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November. [Downloadable!] (restricted)
  6. Guillermo Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," NBER Working Papers 9808, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June. [Downloadable!] (restricted)
  8. Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," CEG Working Papers 20013, Trinity College Dublin, Department of Economics. [Downloadable!]
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  9. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile. [Downloadable!]
  10. Anubha Dhasmana, 2008. "Welfare Gains of Aid Indexation in Small Open Economies," IMF Working Papers 08/101, International Monetary Fund. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wendell A. Samuel & Mario Dehesa & Emilio Pineda, 2009. "Optimal Reserves in the Eastern Caribbean Currency Union," IMF Working Papers 09/77, International Monetary Fund. [Downloadable!]
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