## Are Emerging Asia’s Reserves Really Too High?

_IMF Working Papers, August 1, 2008_

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## Bibliographic details
- Authors: Marta Ruiz-Arranz, Milan Zavadjil
- Published: August 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451870503.001

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### Key findings
- 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.
- 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.

### Analytical approach and concepts
- Optimal insurance model: Reserves serve as a steady liquidity source to cushion sudden stops in capital inflows and their impact on output and consumption.
- Spread reduction channel: Reserves reduce spreads on privately held external debt, contributing to reserve accumulation dynamics since 1997-98.
- Threshold estimation techniques: Used to identify reserve levels at which additional reserves begin to yield diminishing returns in borrowing-cost reductions.

### Policy-relevant implications
- For most Asian countries, current reserve levels are consistent with precautionary needs implied by optimal insurance considerations.
- China may require separate consideration given its potentially distinct reserve dynamics.
- Additional reserves can still be beneficial for most Asian economies by lowering borrowing costs through reduced spreads on external private debt.

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## Content in this bundle

- **Box 1: Why Scale Reserves by Gross External Liabilities?**
  - [Box 1: Why Scale Reserves by Gross External Liabilities? (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08192.pdf.md){rel="alternate" type="text/markdown"}
  - [Box 1: Why Scale Reserves by Gross External Liabilities? (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08192.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/are-emerging-asias-reserves-really-too-high-22169_