DP6723 The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications

Author(s): Olivier Jeanne, Romain Rancière
Publication Date: February 2008
Keyword(s): balance-of-payments crises, International Reserves, Sudden Stops
JEL(s): F32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6723

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.