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The Self-insurance Role of International Reserves and the 2008-2010 Crisis

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  • Antonio Francisco A. Silva Jr

Abstract

There is no standard rule for the definition of an “optimal level” of international reserves and several assumptions underlie the rationale behind holding reserves. There are various theoretical approaches, but no standard for the evaluation of the performance of “optimal level” models, and their parameters are difficult to estimate. The literature suggests that the benefits of holding reserves are high, but the accumulation of reserves is a costly strategy. In fact, in a world of high liquidity and free capital flow, establishing an adequate level of international reserves is still a puzzle. The strategy of accumulating international reserves is evaluated here using data from the 2008-2010 crisis and it is shown that countries with higher international reserve levels had less adjustment costs between 2008 and 2010. The cost-benefit relationship of holding reserves in the 2008-2010 crisis is also discussed based on a sample with 71 countries.

Suggested Citation

  • Antonio Francisco A. Silva Jr, 2011. "The Self-insurance Role of International Reserves and the 2008-2010 Crisis," Working Papers Series 256, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:256
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps256.pdf
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