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The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications

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  • Jeanne, Olivier
  • Rancière, Romain

Abstract

We present a model of the optimal level of international reserves for a small open economy seeking insurance against sudden stops in capital flows. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent build-up of reserves in emerging market Asia seems in excess of what would be implied by an insurance motive against sudden stops.

Suggested Citation

  • Jeanne, Olivier & Rancière, Romain, 2008. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," CEPR Discussion Papers 6723, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6723
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    More about this item

    Keywords

    balance-of-payments crises; International Reserves; Sudden Stops;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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