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

  • Jeanne, Olivier
  • Rancière, Romain

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6723.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6723
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