- Valerio Crispolti, Era Dabla-Norris, Jun Kim, Kazuko Shirono, and George Tsibouris
- Published Date:
- March 2013
©2013 International Monetary Fund
Joint Bank-Fund Library
Assessing reserve adequacy in low-income countries / Valerio Crispolti… [et al]. – Washington, D.C.: International Monetary Fund, c2013.
p. ; cm. – (Occasional paper; 276)
Includes bibliographical references.
I. Foreign exchange reserves – Developing countries. I. Crispolti, V. (Valerio).
II. Series: Occasional paper (International Monetary Fund); no. 276.
III. International Monetary Fund.
Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
Please send orders to:
International Monetary Fund, Publication Services
P.O. Box 92780, Washington, DC 20090, U.S.A.
Tel.: (202) 623-7430 Fax: (202) 623-7201
Low-income countries (LICs) are routinely faced with exogenous disturbances—sharp swings in the terms of trade and export demand, natural disasters, and volatile financial flows—that contribute to higher volatility in aggregate output and consumption as compared to other countries. Although sound macroeconomic policy frameworks are the first line of defense for limiting country vulnerability, international reserves constitute the main form of self-insurance against such shocks. But assessing reserve adequacy in LICs has been bedeviled by the lack of an agreed methodological framework, with policymakers relying on rules of thumb, such as maintaining reserves equivalent to three months of imports, to evaluate a country’s need. Although such metrics are intuitive and simple, they do not have fully developed theoretical and empirical foundations. Building on an event study analysis of a range of external shocks faced by LICs, this Occasional Paper presents a tractable analytical framework that helps quantify the level of reserves that can be rationalized in terms of insurance against the types of large external shocks faced by LICs.
The paper was prepared as input into the IMF Policy Paper, “Assessing Reserve Adequacy” (2011), by a staff team led by Era Dabla-Norris, Deputy Chief of the Low-Income Strategy Unit in the Strategy, Policy, and Review Department. The other authors were Valerio Crispolti, Jun Il Kim, Kazuko Shirono, and George Tsibouris. Charles Amo-Yartey contributed to Chapter 4. The authors are grateful to Hugh Bredenkamp, Deputy Director, Strategy, Policy, and Review Department, for his guidance and support and helpful suggestions throughout the project, and to Sibarata Das and Ke Wang for excellent research assistance.