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Assessing Reserve Adequacy: The Colombian Case

  • Javier Gómez Restrepo

    ()

  • Juan Sebastián Rojas Bohórquez

    ()

International reserves are very important for emerging economies, as they allow to buffer possible liquidity vulnerabilities within a countries' balance of payments. Consequently, the issue of how many reserves should each country hold is a relevant issue for economic policy. The literature has identified two different methodological approaches to deal with this issue, namely reserve optimality and reserve adequacy indicators, which are carefully reviewed in this paper to determine which is the most appropriate to guide policy decisions in the Colombian case. The indicator proposed by the IMF (2011) was adopted to find the adequate level that this country should hold by calibrating it with historical data for Colombia. This new conservative index suggests that the accumulated levels of reserves have been adequate in recent years and that only in very extreme scenarios there is room to acquire additional reserves. Finally, it is worth highlighting that the methodology developed in this article provides a complementary indicator to the existing ones in order to evaluate the international reserves levels that Colombia should accumulate to reduce its vulnerability to external shocks.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 781.

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Length: 34
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:bdr:borrec:781
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