Are Emerging Asia's Reserves Really Too High?

36 Pages Posted: 12 Sep 2008

See all articles by Marta Ruiz-Arranz

Marta Ruiz-Arranz

International Monetary Fund (IMF)

Milan Zavadjil

International Monetary Fund (IMF)

Date Written: August 2008

Abstract

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. Moreover, 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.

Keywords: Asia and Pacific, Reserves, Liquidity, Capital inflows, Production, Consumption, External debt, Emerging markets

Suggested Citation

Ruiz-Arranz, Marta and Zavadjil, Milan, Are Emerging Asia's Reserves Really Too High? (August 2008). IMF Working Paper No. 08/192, Available at SSRN: https://ssrn.com/abstract=1266525

Marta Ruiz-Arranz (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Milan Zavadjil

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States