Indicators Used for the Assessment of the Reserve Adequacy of Emerging and Developing Countries – International Trends in the Mirror of Theories

The paper examines to what extent usage of the foreign currency reserve adequacy indicators applied by the International Monetary Fund (IMF) and investment banks can be mapped with those recommended in the academic literature. The theoretically relevant indicators differ substantially depending on the given country’s (1) development, (2) freedom of capital movement, and (3) exchange rate regime. In order to examine the question, the authors compiled a broad database, covering more than 100 countries, based on the IMF’s regular country reports. According to the results of the study, the IMF tends to use the short-term external debt and monetary aggregate indicators more often with the increase in income, while the role of the import rule gradually decreases as a function of income. There is a positive relation between the import rule and use of capital controls, while it is the other way round in the case of short-term external debt and the monetary aggregate indicators. For countries with a fixed exchange rate regime, the monetary aggregate and import indicators are used more often than for those with a floating exchange rate regime, while the use of short-term external debt is less frequent. The reserve indicators used for various combinations of country characteristics show groupspecific features rather than being a simple aggregation of the indicators used for the individual country characteristics. The authors examined separately the group of countries of similar development level and exchange rate regime as Hungary, which do not apply capital controls, as well as the non-euro area region of the EU, where in its country reports the IMF assesses the reserve adequacy based on the self-elaborated composite metric – which attaches a high weight to short-term debt – on the one hand, and based on short-term external debt, on the other hand.