Precautionary Reserves: An Application to Bolivia

IMF Working Papers, March 1, 2010

Source details

Using precautionary savings models the paper computes levels of optimal reserves for Bolivia.
Focus is on current account shocks as the key balance of payments risk because of:
- Bolivia's reliance on commodity exports; and
- little integration with capital markets.
Models generate an optimal level of net foreign assets ranging from 29 to 37 percent of GDP.
Comparison with standard rule of thumb measures of reserve adequacy shows substantially lower levels of adequate reserves for Bolivia.

Optimal net foreign assets: 29 to 37 percent of GDP.
Standard rule-of-thumb reserve adequacy measures imply substantially lower reserves for Bolivia than the precautionary-savings models indicate.
The divergence between model-based optimal reserves and rule-of-thumb measures underscores the importance of accounting for country-specific risks.

Reserve adequacy assessments should appropriately account for country-specific risks (for example, reliance on commodity exports and limited capital market integration) to derive adequate measures of reserve buffers.
Precautionary savings frameworks provide a quantitatively higher benchmark for reserve policy in the presence of current account risk.

Application of precautionary savings models tailored to a small, commodity-exporting economy with limited capital market integration.
Emphasis on current account shock scenarios as the primary source of balance-of-payments vulnerability.

Source: Precautionary Reserves: An Application to Bolivia, IMF Working Papers 2010, 054.