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Optimal versus adequate level of international reserves: evidence for Turkey

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The determination of international reserve balance for emerging economies is part of the efforts to strengthen the immunity of these economies to crises. However, there is still evidence on crises even for the countries with large foreign reserves. It has usually been experienced that the countries with greatest need for reserves economize more than others on their holdings since they might underestimate the cost of crisis. In this study, the official international reserves of Turkey are tested against optimality and adequacy. During 1988–2002, the actual reserves fell short of both the optimal and the adequate levels. They are only optimal when the expected cumulative contraction is about 5.2% of real GDP under crisis. However, early evidence from emerging economies and Turkey show that crises hit more heavily. Hence, it is found that the current financial structure in Turkey such as the absence of capital controls and a highly dollarized banking system necessitates more foreign reserves for preventing any future economic and/or financial shocks.

Document Type: Research Article


Affiliations: 1: Bilkent University, Faculty of Business Administration, 06800 Bilkent, Ankara, Turkey 2: Central Bank of Republic of Turkey, Money and FX Markets, 06100 Ulus, Ankara, Turkey

Publication date: July 20, 2005

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