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About International Reserve Adequacy: The Case of Chile

Author

Listed:
  • Claudio Soto G.
  • Alberto Naudon D.
  • Eduardo López E.
  • Álvaro Aguirre R.

Abstract

Under a flexible exchange rate regime, international reserves contribute to reducing the risk of a financial crisis, and allow the monetary authority to intervene exceptionally in the exchange market. However, holding reserves is costly. In this paper, we analyze several issues concerning the adequate level of Chilean international reserves. First we compare the level of Chile's international reserves with those of different sets of countries, using various indicators. We then analyze empirically some of the benefits and costs of holding reserves. Our results show that Chile's international reserves are high when measured with respect to GDP or M2, but they are in line with those of countries of similar characteristics when measured as a fraction of short-term residual debt. On the other hand, given the low risk of the Chilean economy, marginal changes in reserves have a very low impact on both the probability of a financial crisis and the sovereign spread of the country. Finally, as the sovereign spread has decreased over the last years, so too has the cost of reserves. In fact, over the past few years Chile's cost of reserves as a fraction of GDP has been considerably lower than the cost of other emerging economies.

Suggested Citation

  • Claudio Soto G. & Alberto Naudon D. & Eduardo López E. & Álvaro Aguirre R., 2004. "About International Reserve Adequacy: The Case of Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 7(3), pages 5-34, December.
  • Handle: RePEc:chb:bcchec:v:7:y:2004:i:3:p:5-34
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    References listed on IDEAS

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