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Large Hoardings of International Reserves: Are They Worth It?

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  • Pablo García
  • Claudio Soto

Abstract

We empirically assess the contribution of international reserves vis- à -vis institutional variables in reducing the risk of a currency crisis. We find that the ratio of reserves to short-term debt is robust in explaining international crisis, even after controlling for financial development and political variables. Based on our estimates on crisis probabilities we compute the optimal level of reserves for a set of East Asian economies and for Chile. The results of this exercise turn out to be very sensitive to the data utilized and to the assumptions regarding the cost of a crisis. For our benchmark estimate we conclude that the current stocks of reserves for most of the cases are consistent with an optimal selfinsurance policy under reasonable assumptions regarding the cost of a crisis.

Suggested Citation

  • Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:299
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