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In an earlier paper, Rancière and Jeanne (2006) present a similar model of optimal reserves. We calibrate both models and obtain similar results. This paper presents calibration results of the 2007 model; results using the 2006 model are available upon request.
Risk aversion is assumed to be equal to 2, in line with the previous literature.
Results are robust to using averages corresponding to different time periods. The real GDP series are detrended with a Hodrik Prescott filter.
Jeanne identifies sudden stops as those years in which net capital inflows fell by more than 5 percent of GDP.
For the sake of simplicity and presentation, only the economies with the highest reserve ratios are presented in the Figure. Results for the remaining emerging economies in the analysis are available upon request.
The test of the null hypothesis of no threshold against the alternative of threshold is performed using a Wald test under the assumption of homoskedastic errors. Using 1000 bootstrap replications, the p-value for the threshold model was 0. This suggests that there is evidence of a regime change at the specified level of reserves.