## Precautionary Reserves: An Application to Bolivia

_IMF Working Papers, March 1, 2010_

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## Bibliographic details
- Authors: Fabian Valencia
- Published: March 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451963502.001

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### Summary and research focus
- 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.

### Major findings
- 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.

### Policy implications and recommendations
- 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.

### Methodology (high level)
- 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.

### Key metadata and classification
- Author: Fabian Valencia
- Publication date: March 1, 2010
- Series: Working Paper No. 2010/054
- Issue: 054
- Volume: 2010
- Pages: 25
- DOI: https://doi.org/10.5089/9781451963502.001
- Stock No: WPIEA2010054
- ISBN: 9781451963502
- ISSN: 1018-5941
- Subjects: Consumption, External debt, Foreign assets, Income, Terms of trade
- Keywords: central bank, precautionary motive, WP

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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/precautionary-reserves-an-application-to-bolivia-23670_