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Precautionary Reserves: An Application To Bolivia

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Executive Summary

Using precautionary savings models the author computes levels of optimal reserves for Bolivia. Because of Bolivia's reliance on commodity exports and little integration with capital markets, and focuses on current account shocks as the key balance of payments risk. These models generate an optimal level of net foreign assets ranging from 29 to 37 percent of GDP. For comparison purposes, the author contrasted these results with standard rule of thumb measures of reserve adequacy, which in the case of Bolivia resulted in substantially lower levels of adequate reserves. These differing results emphasize the need to appropriately account for country-specific risks in order to derive adequate measures of reserve buffers.

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