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Optimal Reserves in the Eastern Caribbean Currency Union

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  • Wendell A. Samuel
  • Emilio Pineda
  • Mario Dehesa
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    Abstract

    Recent turbulence in global and Caribbean regional financial markets underscore the importance of reassessing the adequacy of international reserves held by the Eastern Caribbean Central Bank (ECCB). Using the Jeanne (2007) optimization framework, this paper finds that international reserves held by the ECCB are generally adequate for a variety of external current account and capital account shocks. However, the ECCB would be challenged in the event of moderate to severe deposit outflows.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/77.

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    Length: 20
    Date of creation: 01 Apr 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/77

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    Related research

    Keywords: Eastern Caribbean Currency Union; Emerging markets; Capital flows; Economic models; banking; reserve adequacy; current account; central bank; external debt; banking system; currency board; reserve holdings; foreign exchange; eastern caribbean central bank; bank run; currency crisis; international reserve; banking crisis; banking crises; external shock; capital account liberalization; balance of payments; banking sector; short-term debt; currency crises; reserve management; public debt; reserve holding; bank runs; foreign currency debt; current account adjustment; current account balance; reserve bank; central banks; banking system liabilities; external public debt; systemic banking crisis; debt servicing needs; sovereign risk; bank deposit; currency debt; reserve accumulation; external shocks; balance sheet effects; bank reserve; macroeconomic stabilization; external liability; capital mobility; external debt servicing;

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    References

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    1. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," Working Papers id:357, eSocialSciences.
    2. Holger Floerkemeier & Mariusz A. Sumlinski, 2008. "International Reserve Trends in the South Caucasus and Central Asia Region," IMF Working Papers 08/41, International Monetary Fund.
    3. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 241-270.
    4. Aizenman, Joshua & Marion, Nancy P., 2003. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Santa Cruz Center for International Economics, Working Paper Series qt9s7978n1, Center for International Economics, UC Santa Cruz.
    5. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," IDB Publications 6841, Inter-American Development Bank.
    6. Drummond, Paulo & Dhasmana, Anubha, 2008. "Foreign Reserve Adequacy in Sub-Saharan Africa," MPRA Paper 9729, University Library of Munich, Germany.
    7. Judd, John P & Scadding, John L, 1982. "The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 993-1023, September.
    8. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
    9. Olivier Jeanne, 2007. "International Reserves in Emerging Market Countries: Too Much of a Good Thing?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 1-80.
    10. Fernando M. Gonçalves, 2007. "The Optimal Level of Foreign Reserves in Financially Dollarized Economies," IMF Working Papers 07/265, International Monetary Fund.
    11. Pablo Druck & Mario Dehesa, 2008. "The Eastern Caribbean Central Bank," IMF Working Papers 08/214, International Monetary Fund.
    12. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June.
    13. John P. Judd & John L. Scadding, 1982. "The search for a stable money demand function: a survey of the post- 1973 literature," Working Papers in Applied Economic Theory 109, Federal Reserve Bank of San Francisco.
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    Cited by:
    1. Cerezo Aguirre, Sergio Cerezo Aguirre, 2010. "Consideraciones sobre el nivel óptimo de reservas internacionales para Bolivia: 2003-2009," Revista Latinoamericana de Desarrollo Economico, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana, issue 14, pages 41-70.

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