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

Author(s): Olivier Jeanne and Romain Rancière

Publication Date: February 2008

Keyword(s): balance-of-payments crises, International Reserves and Sudden Stops

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Jeanne, O and Rancière, R. 2008. 'The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6723