Can High Reserves Offset Weak Fundamentals? A Simple Model of Precautionary Demand for Reserves
Apart from exchange rate objectives which have resulted in reserve accumulation as a side effect, Asian countries have chosen explicitly to build up reserves for precautionary motives. This paper explores the issue of optimal precautionary demand for reserves by a central bank within a context of a simple analytical model. The model suggests that, in general, high reserve can help offset weak fundamentals. However, if fundamentals are suffi ciently weak no level of reserves will be able to offset the weak fundamentals.
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Volume (Year): 59 (2006)
Issue (Month): 3 ()
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- Keltzer, K. & Spiegel, M., 1999.
"Sterilization Costs and Exchange Rate Targeting,"
pb99-03, Economisch Institut voor het Midden en Kleinbedrijf-.
- Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
- Christian B. Mulder & Matthieu BussiÃ¨re, 1999. "External Vulnerability in Emerging Market Economies: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund.
- M. Nowak & Ketil Hviding & Luca Antonio Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 04/189, International Monetary Fund.
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