Optimal Reserves in Financially Closed Economies

April 12, 2016

Preview Citation

Format: Chicago

Olivier D Jeanne, and Damiano Sandri. Optimal Reserves in Financially Closed Economies, (USA: International Monetary Fund, 2016) accessed March 6, 2025

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used by practitioners. Second, under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports. Third, simple linear rules can capture most of the welfare gains from optimal reserve management. Fourth, policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself.

Subject: Central banks, Consumption, Exports, Imports, Income, International trade, National accounts, Reserve positions, Reserves management

Keywords: Carry cost, Cost-benefit approach, Current account, Exports, Global, Imports, Income, Interest rate, Level of reserve, Official reserves, Open economy, Opportunity cost, Precautionary savings, Real rate of interest, Reserve positions, Reserves management, Welfare cost, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/092
Stock No:

WPIEA2016092
ISBN:

9781484325445
ISSN:

1018-5941

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