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Precautionary Reserves: An Application to Bolivia

Author/Editor: Valencia, Fabian
Authorized for Distribution: March 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,055KB)
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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: Using precautionary savings models we compute levels of optimal reserves for Bolivia. Because of Bolivia's reliance on commodity exports and little integration with capital markets, we focus on current account shocks as the key balance of payments risk. These models generate an optimal level of net foreign assets ranging from 29 to 37 percent of GDP. For comparison purposes, we contrasted these results with standard rule of thumb measures of reserve adequacy, which in the case of Bolivia resulted in substantially lower levels of adequate reserves. These differing results emphasize the need to appropriately account for country-specific risks in order to derive adequate measures of reserve buffers.
 
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Series: Working Paper No. 10/54
Subject(s): Balance of payments | Bolivia | Commodity prices | Current account | Economic models | Export prices | External shocks | Reserves accumulation | Reserves adequacy | Terms of trade
Author's keyword(s): Reserve adequacy | Optimal Reserves | Precautionary Motive | Balance of Payments Crises.
 
English  
    Published:   March 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010054   Pages:   25
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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