European Parliament Library

The Optimal Level of Foreign Reserves in Financially Dollarized Economies :, The Case of Uruguay, Fernando M. Gonçalves

Abstract
This paper extends the framework derived by Jeanne and Rancière (2006) by explicitly incorporating the dollarization of bank deposits into the analysis of the optimal level of foreign reserves for prudential purposes. In the extended model, a sudden stop in capital flows occurs in tandem with a run on dollar deposits. Reserves can smooth consumption in a crisis but are costly to carry. The resulting expression for the optimal level of reserves is calibrated for Uruguay, a country with high dollarization of bank deposits. The baseline calibration indicates that the gap between actual and optimal reserves has declined sharply since the 2002 crisis due to a substantial reduction in vulnerabilities. While the results suggest that reserves are now near optimal levels, further accumulation may be desirable going forward, partly because banks' currently high liquidity levels are likely to decline as the credit recovery matures
Table Of Contents
Contents; I. Introduction; II. Reserves as Insurance and the 2002 Crisis in Uruguay; III. Vulnerabilities of The Uruguayan Economy; Figures; 1. Financial Account Reversal, Dollar Deposits and Reserves in Uruguay; 2. Short-term Foreign Currency Debt and Foreign Currency Deposits in Uruguay; 3. Withdrawal of Foreign Currency Deposits in 2002; IV. The Optimal Level of Reserves in Uruguay; 4. Benchmark Measures of Reserve Adequacy; Tables; 1. Variable Parameters; 2. Fixed Parameters; 5. Output Loss Due to the 2002 Crisis in Uruguay; V. Sensitivity Analysis
Language
eng
Literary Form
non fiction
Note
Description based upon print version of record
Physical Description
1 online resource (26 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781452773315

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