Abstract
Adequacy of reserves and the optimal level of reserves in Jamaica are analyzed using a model proposed by Jeanne and Rancière (The optimal level of international reserves for emerging market countries: A new formula and some applications. IMF, Working Paper, WP/06/229, 2006) and corroborated by a simple model proposed by Heller (Economic Journal, 76, 296–311, 1966). According to the model, the targeted level of reserves is 8.9 percent of GDP averaging US $1.226 billion over the last five years. Foreign exchange flexibility, GDP volatility and population growth significantly impact the targeted level of reserve holdings. Structural changes including structural reforms in the economy and economic shocks impact reserve holdings. The analysis shows that the actual reserve holdings are expected to trend downwards in the future while the optimal reserve is expected to increase, both converging gradually over time.
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- 1.
Normally weeks of imports are calculated on the Gross International Reserves, but the NIR is more suitable in this case.
- 2.
Central Bank of Costa Rica.
- 3.
Gross international reserves represent the official holdings of foreign assets, by the Central Bank and the Central Government.
- 4.
Outline how it is calculated.
- 5.
Outline calculation.
- 6.
The long-term security issued by the government is a bond that yields one unit of good in every period until the sudden stop occurs.
- 7.
According to Heller (1966), the differential between the social yield on capital invested and the yield on international reserves is the appropriate concept of the opportunity cost of holding liquid international reserves.
- 8.$$CAGR = {\left( {\frac{{{T_n}}}{{{T_0}}}} \right)^{\left( {\frac{1}{n}} \right)}} - 1$$
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Haughton, A. (2017). Net International Reserve Adequacy and the Optimal Reserves. In: Developing Sustainable Balance of Payments in Small Countries. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-53031-4_7
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DOI: https://doi.org/10.1007/978-3-319-53031-4_7
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