International reserves adequacy: Advanced and emerging countries

Abstract

The experience of two crises in the last two decades has made more countries think about contingencies. Foreign exchange reserves are by far the go to option for most countries and that can be seen from the way the foreign exchange reserves have been accumulated in the recent years. However, historically the primary motive of maintaining reserves has been to control the countries exchange rate. The crisis saga has however changed the scenario as countries now store reserves for precautionary purposes than for making interventions in the market. This is primarily because of the change in exchange rate policy followed by counties. There are also many views on whether advanced counties would require reserves. The reserves adequacy in the case of emerging countries has also been the point of discussion since 2010. In this report we have tried to analyse reserve adequacy as whole in an attempt to understand the implications of low/high reserves. The methodology that we have followed is literature review of 3 advanced countries - Israel, Sweden and Switzerland & 4 emerging countries – Russia, Singapore, China, and South Korea. The literature review has been performed mainly by using IMF publications.