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

Olivier Jeanne (1, 2, 3, 4) , Romain Rancière (3, 5, 6)

1 JHU - Johns Hopkins University
2 Peterson Institute for International
3 CEPR - Center for Economic Policy Research
4 NBER - The National Bureau of Economic Research
5 PSE - Paris-Jourdan Sciences Economiques
6 PSE - Paris School of Economics

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. The buildup of reserves in emerging market Asia can be explained only if one assumes a large anticipated output cost of sudden stops and a high level of risk aversion.

Domaines: Economies et finances

Olivier Jeanne, Romain Rancière. The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications. The Economic Journal, 2011, 121 (555), pp.905-930. ⟨10.1111/j.1468-0297.2011.02435.x⟩. ⟨halshs-00754518⟩