Can High Reserves Offset Weak Fundamentals? A Simple Model of Precautionary Demand for Reserves
Jie Li () and
No 2005-09, Centre for International Economic Studies Working Papers from University of Adelaide, Centre for International Economic Studies
Apart from exchange rate objectives which have resulted in reserve accumulation as a side effect, Asian countries have chosen explicitly to build up reserves at least in part 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 reserves can help offset moderately weak fundamentals. However, if fundamentals are sufficiently weak, no level of reserves will be able to counterbalance the weak fundamentals. This is broadly consistent with the escape clause based second-generation models of currency crisis.
Keywords: crisis management; crisis prevention; currency crisis; precautionary motive; reserves. (search for similar items in EconPapers)
Pages: 21 pages
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Journal Article: Can High Reserves Offset Weak Fundamentals? A Simple Model of Precautionary Demand for Reserves (2006)
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