Optimal Reserves in Financially Closed Economies / Olivier Jeanne, Damiano Sandri.

Format:

Book

Author/Creator:

Jeanne, Olivier.

Contributor:

Sandri, Damiano.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22139.

NBER working paper series no. w22139

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

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.

Notes:

Print version record

March 2016.