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Are Emerging Asia’s Reserves Really Too High?

Author/Editor: Ruiz-Arranz, Marta | Zavadjil, Milan
Authorized for Distribution: August 1, 2008
Electronic Access: Free Full Text (PDF file size is 526KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Empirical analysis does not suggest that reserves are "too high" in the majority of Asian countries, though China may be a special case. Much of the reserve increase in Asia can be explained by an optimal insurance model under which reserves provide a steady source of liquidity to cushion the impact of a sudden stop in capital inflows on output and consumption. Moreover, the benefits of reserves in terms of reduced spreads on privately held external debt further explains the observed growth in reserves since 1997-98. Using threshold estimation techniques, the paper shows that most of Asia can still benefit from higher reserves in terms of reduced borrowing costs.
 
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Series: Working Paper No. 08/192
Subject(s): Asia and Pacific | Reserves | Liquidity | Capital inflows | Production | Consumption | External debt | Emerging markets
Author's keyword(s): Foreign exchange reserves | capital flows
 
English  
    Published:   August 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008192   Pages:   34
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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