Large Hoardings of International Reserves: Are They Worth It?

Pablo Garcia Silva and Claudio Soto

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We empirically assess the contribution of international reserves vis- à -vis institutional variables in reducing the risk of a currency crisis. We find that the ratio of reserves to short-term debt is robust in explaining international crisis, even after controlling for financial development and political variables. Based on our estimates on crisis probabilities we compute the optimal level of reserves for a set of East Asian economies and for Chile. The results of this exercise turn out to be very sensitive to the data utilized and to the assumptions regarding the cost of a crisis. For our benchmark estimate we conclude that the current stocks of reserves for most of the cases are consistent with an optimal selfinsurance policy under reasonable assumptions regarding the cost of a crisis.

Date: 2004-12
New Economics Papers: this item is included in nep-cba
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Chapter: Large Hoardings of International Reserves: Are They Worth It? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:299

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