Optimum international reserves and sovereign risk: Evidence from India

Prabheesh K.P.

Journal of Asian Economics, 2013, vol. 28, issue C, 76-86

Abstract: This paper empirically determines the optimal level of international reserves for India by explicitly incorporating the country's sovereign risk associated with the default on external debt. The optimum level of reserves is determined by minimizing the central bank's cost function, which consists of costs due to high reserve holdings and costs due to reserve depletion. The simulated optimum reserves for the period 1994–2010 indicate that actual reserves are higher than the optimum value across the sample period, except during 1997–1998.

Keywords: International reserves; Sovereign risk; Optimization; ARCH; Cointegration (search for similar items in EconPapers)
JEL-codes: E58 F31 F34 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:28:y:2013:i:c:p:76-86

DOI: 10.1016/j.asieco.2013.07.001

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