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Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefit Analysis
Author: Ms. Era Dabla-Norris, Mr. Jun I Kim, and Ms. Kazuko Shironohttps://orcid.org/0000-0003-2325-1075
Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 249
Language:
English
Publication Date:
01 Oct 2011
DOI:
https://doi.org/10.5089/9781463923280.001
ISBN:
9781463923280
ISSN:
1018-5941
Pages:
35
Keywords:
WP; optimal reserve; demand regression; commodity exporter; exchange rate regime; IMF program; precautionary reserves holding; Reserve adequacy; optimal level of reserves; low-income countries; opportunity cost; reserve coverage; cost-benefit framework; holdings reserve; Exchange rate arrangements; Conventional peg; Exchange rate flexibility; Imports; Reserve positions; Africa
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper develops a cost-benefit approach that helps to quantify the optimal level of international reserves in low-income countries, focusing on the role of reserves in preventing and mitigating absorption drops triggered by large external shocks. The approach is applied to a sample of 49 LICs over the period 1980-2008 to yield estimates of the likelihood and severity of a crisis. The calibration results suggest that the standard metric of three months of imports is inadequate for countries with fixed exchange rate regimes. The results also highlight the role of overall policy frameworks and availability of Fund-support in determining optimal reserve levels, raising questions about the uniform applicability of standard rules of thumb across countries.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund