Central Bank Reserve Management: How Much is Too Much?

6-how much central bank reserves

#ActiveAllocator Research: Ideas about the right level of international reserves have changed with the evolution of markets and crises. Paul Krugman in a recent interview suggested that the attitude at the moment should be “don’t worry about government deficits so much and start spending”. The U.S. Federal Reserve and other counterparts have moved aggressively with sweeping emergency rate cuts, and offers of cheap dollars, to help combat the coronavirus pandemic. Emergency policy easing by central banks in UK, Europe, Japan provide stabilization. But can countries pump indefinite  liquidity into markets to support monetary and fiscal stimulus? The coronavirus pandemic will test how much debt countries can bear.

 

For much of the post-war period, the rule of thumb was that international reserves should cover three-to-four months of imports. The Guidotti rule that reserves should exceed short term debt is now generally accepted as benchmark for assessing the adequacy of reserves – governments should be able to stay out of market for new financing for up to a year if needed. With the growth of capital markets, views of reserve adequacy have changed. Countries are now expected to have more reserves to protect against potentially large and disruptive capital flows, even if the exchange rate regime is floating

Factors include the exchange rate regime, the size and currency composition of the debt, trade flows, monetary aggregates and an assessment of risks and structural aspects of the market. Taking all these into account often raises the estimate of required reserves

 

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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