The need for official reserves in Latin America: assessing the precautionary motive, 1995-2011

Abstract

We model the demand for official reserves in Latin America during the period 1995-2011. We assume that the main concern of the monetary authorities to demand reserves is the fear of suffering external drains, and its associated output lost. In other words, the so-called precautionary motive drives the demand for international reserves in the regions. Our econometric results confirm that countries in the region demand ever increasing amounts of foreign exchange to protect themselves against the likelihood of external drains.