Optimal Reserves in Financially Closed Economies

Olivier Jeanne and Damiano Sandri

No 2016/092, IMF Working Papers from International Monetary Fund

Abstract: Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used by practitioners. Second, under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports. Third, simple linear rules can capture most of the welfare gains from optimal reserve management. Fourth, policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself.

Keywords: WP; interest rate; opportunity cost; open economy; Official reserves; current account; precautionary savings; carry cost; cost-benefit approach; real rate of interest; welfare cost; level of reserve; Reserve positions; Imports; Reserves management; Exports; Income; Global (search for similar items in EconPapers)
Pages: 29
Date: 2016-04-12
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Optimal reserves in financially closed economies (2020)
Working Paper: Optimal Reserves in Financially Closed Economies (2016)
Working Paper: Optimal Reserves in Financially Closed Economies (2016)
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