Are Emerging Asia’s Reserves Really Too High?

Marta Ruiz-Arranz and Milan Zavadjil

No 2008/192, IMF Working Papers from International Monetary Fund

Abstract: Empirical analysis does not suggest that reserves are "too high" in the majority of Asian countries, though China may be a special case. Much of the reserve increase in Asia can be explained by an optimal insurance model under which reserves provide a steady source of liquidity to cushion the impact of a sudden stop in capital inflows on output and consumption. Moreover, the benefits of reserves in terms of reduced spreads on privately held external debt further explains the observed growth in reserves since 1997-98. Using threshold estimation techniques, the paper shows that most of Asia can still benefit from higher reserves in terms of reduced borrowing costs.

Keywords: WP; adequacy indicator; reserve buildup; broad money; level of reserve; reserve accumulation; reserve threshold coefficient; short-term debt (search for similar items in EconPapers)
Pages: 34
Date: 2008-08-01
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Citations: View citations in EconPapers (5)

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