Assessing Reserve Adequacy - Supplementary Information


Date: February 14, 2011
 
Electronic Access: Full Text

 
Summary:The dramatic increase in reserves holdings over the past decade has resumed since the global financial crisis, even at an accelerated pace. While the crisis has heightened perceptions of the importance of holding adequate reserves, there is little consensus on what constitutes an adequate level from a precautionary perspective: traditional metrics are narrowly-based and often provide conflicting signals; while newer approaches tend to be hostage to stylized modeling assumptions and calibrations. As a result, assessments tend to rely on comparisons with peers, probably amplifying the upward trend as perceived needs rise in line with actual holdings.

The metric proposed in the main paper is based on outflows—principally in relation the relevant stock of underlying foreign liabilities or domestic assets—during periods of exchange market pressure (EMP). Especially as it remains the primary reason countries accumulate reserves for insurance purposes, the metric is based on balance of payments drains experienced during EMP episodes—i.e., a measure of sufficient reserves periods of pressure and ahead of a full-blown crisis.

 
Series : Policy Paper
Subject(s): Reserves adequacy | Korea, Republic of | Emerging markets | Banks | Foreign exchange | External shocks | Reserves | Economic models