Optimal Reserves in Financially Closed Economies
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.
The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. This paper was written while Olivier Jeanne was visiting the Research Department of the IMF, whose hospitality is gratefully acknowledged. We thank Joshua Aizenman, Anton Korinek, Jonathan Ostry and Chris Otrok for helpful comments, as well as seminar participants at the 2016 AEA meetings (San Francisco) and the IMF. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Olivier Jeanne & Damiano Sandri, 2016. "Optimal Reserves in Financially Closed Economies," IMF Working Papers, vol 16(92).
Jeanne, Olivier & Sandri, Damiano, 2020. "Optimal reserves in financially closed economies," Journal of International Money and Finance, Elsevier, vol. 104(C). citation courtesy of
Olivier Jeanne & Damiano Sandri, 2020. "Optimal reserves in financially closed economies," Journal of International Money and Finance, vol 104.