Can High Reserves Offset Weak Fundamentals? A Simple Model of Precautionary Demand for Reserves

Jie Li () and Ramkishen Rajan

Economia Internazionale / International Economics, 2006, vol. 59, issue 3, 317-328

Abstract: Apart from exchange rate objectives which have resulted in reserve accumulation as a side effect, Asian countries have chosen explicitly to build up reserves for precautionary motives. This paper explores the issue of optimal precautionary demand for reserves by a central bank within a context of a simple analytical model. The model suggests that, in general, high reserve can help offset weak fundamentals. However, if fundamentals are suffi ciently weak no level of reserves will be able to offset the weak fundamentals.

Keywords: Crisis Management; Crisis Prevention; Precautionary Motive; Reserves (search for similar items in EconPapers)
JEL-codes: F15 F31 F43 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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