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

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  • Olivier Jeanne
  • Romain Rancière

Abstract

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. The buildup of reserves in emerging market Asia can be explained only if one assumes a large anticipated output cost of sudden stops and a high level of risk aversion.
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  • Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, vol. 121(555), pages 905-930, September.
    • Handle: RePEc:ecj:econjl:v:121:y:2011:i:555:p:905-930
    DOI: j.1468-0297.2011.02435.x
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    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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