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Optimum international reserves and sovereign risk: Evidence from India

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  • K.P., Prabheesh

Abstract

This paper empirically determines the optimal level of international reserves for India by explicitly incorporating the country's sovereign risk associated with the default on external debt. The optimum level of reserves is determined by minimizing the central bank's cost function, which consists of costs due to high reserve holdings and costs due to reserve depletion. The simulated optimum reserves for the period 1994–2010 indicate that actual reserves are higher than the optimum value across the sample period, except during 1997–1998.

Suggested Citation

  • K.P., Prabheesh, 2013. "Optimum international reserves and sovereign risk: Evidence from India," Journal of Asian Economics, Elsevier, vol. 28(C), pages 76-86.
    • Handle: RePEc:eee:asieco:v:28:y:2013:i:c:p:76-86
    DOI: 10.1016/j.asieco.2013.07.001
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    More about this item

    Keywords

    International reserves; Sovereign risk; Optimization; ARCH; Cointegration;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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