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The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications

  • Olivier Jeanne
  • Romain Rancière

We present a model of the optimal level of international reserves for a small open economy seeking insurance against sudden stops in capital flows. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent build-up of reserves in emerging market Asia seems in excess of what would be implied by an insurance motive against sudden stops.

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File URL: http://hdl.handle.net/10.1111/j.1468-0297.2011.02435.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 555 (09)
Pages: 905-930

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:555:p:905-930
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