{
  "title": "Optimal Reserves in Financially Closed Economies",
  "publication": "IMF Working Papers, April 12, 2016",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/optimal-reserves-in-financially-closed-economies-43866",
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  "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.",
  "sections": [
    {
      "heading": "Overview and research question",
      "content": "- Authors: Olivier D Jeanne, Damiano Sandri\n- Publication date: April 12, 2016\n- Series: IMF Working Paper No. 2016/092\n- Pages: 29\n- DOI: https://doi.org/10.5089/9781484325445.001\n- Issue: 092\n- Volume: 2016\n- ISBN: 9781484325445\n- ISSN: 1018-5941"
    },
    {
      "heading": "Main findings",
      "content": "- Financially closed economies insure themselves against current-account shocks using international reserves.\n- The welfare-based opportunity cost of reserves differs from the measures often used by practitioners.\n- Under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports.\n- Simple linear rules can capture most of the welfare gains from optimal reserve management.\n- Policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself."
    },
    {
      "heading": "Methodology and analytical framework",
      "content": "- The study characterizes optimal reserve management using an open-economy model of precautionary savings.\n- Emphasis is placed on welfare-based metrics for evaluating opportunity costs and on deriving policy rules that approximate optimal behavior."
    },
    {
      "heading": "Subjects and keywords (as listed)",
      "content": "- Subjects: Central banks, Consumption, Exports, Imports, Income, International trade, National accounts, Reserve positions, Reserves management\n- Keywords: carry cost, cost-benefit approach, current account, Exports, Global, Imports, Income, interest rate, level of reserve, Official reserves, open economy, opportunity cost, precautionary savings, real rate of interest, Reserve positions, Reserves management, welfare cost, WP"
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Reassess commonly used practitioner measures of reserve opportunity cost in favor of welfare-based metrics.\n- Consider that maintaining reserves close to three months of imports can be consistent with optimal policy under plausible calibrations.\n- Employ simple linear rules for reserve management, as they can capture most welfare gains relative to fully state-contingent optimal policies.\n- Prioritize designing operational responses—how to use reserves when shocks occur—over focusing exclusively on a fixed reserve target.\n\nOlivier D Jeanne, and Damiano Sandri. \"Optimal Reserves in Financially Closed Economies\", IMF Working Papers 2016, 092 (2016), accessed 9/17/2026, https://doi.org/10.5089/9781484325445.001\n\n---\n\n Content in this bundle\n\n- wp1692\n  - wp1692 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp1692 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/optimal-reserves-in-financially-closed-economies-43866"
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    "Authors: Olivier D Jeanne, Damiano Sandri",
    "Published: April 12, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484325445.001",
    "Authors: Olivier D Jeanne, Damiano Sandri",
    "Publication date: April 12, 2016",
    "Series: IMF Working Paper No. 2016/092",
    "Pages: 29",
    "DOI: https://doi.org/10.5089/9781484325445.001",
    "Issue: 092",
    "Volume: 2016",
    "ISBN: 9781484325445",
    "ISSN: 1018-5941",
    "Financially closed economies insure themselves against current-account shocks using international reserves.",
    "The welfare-based opportunity cost of reserves differs from the measures often used by practitioners.",
    "Under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports.",
    "Simple linear rules can capture most of the welfare gains from optimal reserve management.",
    "Policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself.",
    "The study characterizes optimal reserve management using an open-economy model of precautionary savings.",
    "Emphasis is placed on welfare-based metrics for evaluating opportunity costs and on deriving policy rules that approximate optimal behavior.",
    "Subjects: Central banks, Consumption, Exports, Imports, Income, International trade, National accounts, Reserve positions, Reserves management",
    "Keywords: carry cost, cost-benefit approach, current account, Exports, Global, Imports, Income, interest rate, level of reserve, Official reserves, open economy, opportunity cost, precautionary savings, real rate of interest, Reserve positions, Reserves management, welfare cost, WP",
    "Reassess commonly used practitioner measures of reserve opportunity cost in favor of welfare-based metrics.",
    "Consider that maintaining reserves close to three months of imports can be consistent with optimal policy under plausible calibrations.",
    "Employ simple linear rules for reserve management, as they can capture most welfare gains relative to fully state-contingent optimal policies.",
    "Prioritize designing operational responses—how to use reserves when shocks occur—over focusing exclusively on a fixed reserve target.",
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