Research
``Sudden Stops, Productivity, and the Optimal Level of International Reserves in Small Open Economies`` with Alexander Mihailov.
This paper contributes to the theory of optimal international reserves by extending the Jeanne-Rancière (Econ J 121:905-930, 2011) endowment small open economy (SOE) model to a SOE with production that accounts for the main sources of economic growth. We, first, derive a richer analytical version of the optimal reserves formula in our set-up, essentially driven by labour-augmenting productivity and the saving rate. Then, under a plausible calibration based on 1975-2020 data averages for typical emerging market countries facing the risk of sudden stops in capital inflows, we find that the optimal reserves-to-output ratio is 7.5%, i.e., the mid-point in the range between that in Jeanne and Rancière (Econ J 121:905-930, 2011), of 9.1%, calibrated to the same sample of 34 middle-income countries, and that in Bianchi et al. (Am Econ Rev 108(9):2629-2670, 2018), of 6.0%, obtained in a different, sovereign debt model without capital and production. We explain the lower optimal reserves-to-output ratio relative to the endowment SOE by the role of capital accumulation as precautionary saving: the accumulated capital stock can potentially be used as a pledge to external creditors in obtaining borrowing, thereby insuring better a SOE against sudden stops. As the countries in our sample appear quite heterogeneous, we also compute the optimal reserves-to-output ratio by region. It turns out that our extended to production insurance SOE model matches well the average reserves-to-output ratio in the data for Latin America, represented by nearly half of our sample, 16 countries, at just above 10%. Yet, for Asia, Africa and Europe our regional model-based ratios understate considerably the respective data averages, suggesting the need to explore alternative modelling approaches.
Keywords: Optimal international reserves · Small open economies · Sudden stops · Production technology · Precautionary saving · Insurance contracts
JEL Classification: E21 · E23 · F32 · F34 · F41 · O40
Citation:
Mihailov, A., Nasir, H. Sudden Stops, Productivity and the Optimal Level of International Reserves for Small Open Economies. Open Econ Rev 33, 825–851 (2022).
https://doi.org/10.1007/s11079-022-09678-2
The Empirics of International Reserves: The Heterogeneity across the International Reserve Distribution in Small Open Economies
This paper examines empirically the key determinants of international reserves in a panel of 26 middle-income economies from 1970 to 2014, with a primary interest to uncover potential common and idiosyncratic characteristics. To this end, we first estimate a pooled OLS regression and a panel data fixed effects model. Secondly, we use quantile regression techniques to analyse the variation of reserve holding determinants across the reserve holdings distribution in our sample. In particular, we apply F-tests to check the uniformity of coefficients in several inter-quantile regressions and we reject the null hypothesis that the models for different quantiles of the reserve distribution in our sample were similar. This shows that the empirical models estimating the relative contribution of each of the key determinants of reserve holdings should consider the country-specific features of middle-income economies. Moreover, our empirical work uncovers a significant positive effect of the investment rate on actual reserve holdings
Keywords: Reserves, Quantile regression, Emerging markets, Sudden Stops, and Investment.
JEL Classification: C3, F31, F32, F37, F41, O57