by:Anna Maria Čeh and Ivo Krznar
Discussant: Iftekhar Hasan
Rensselaer Polytechnic Institute
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The consequences of sudden stop of capital
flows can be very severe and costly
◦ Output and investment contractions
◦ Credit crunches
◦ Bank crisis
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Hoardings of international reserves can selfinsurance against such shocks
Sharp increase of international reserves in
Croatia over the past 10 years
◦ This is also a global phenomenon
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Are the international reserves in Croatia
adequate against shocks in capital flows?
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In order to answer the proposed research
question, a benchmark needs to be established
This paper provides a utility-based welfare
analysis of the optimal international reserves in
Croatia
In addition, this study further calibrate the
optimal international reserve in Croatia to allow
for evaluation of the degree of adequacy of
actual international reserves
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For plausible parameters, the Croatian National
Bank (CNB) has enough reserves against the
1998/1999 crisis
For crisis with larger scale than the one in
1998/1999
◦ The CNB has adequate international reserves
 Only if mother banks do not participate in a sudden stop
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Optimal international reserves hoardings of CNB
are above the evaluation of two indicators
◦ Greenspan-Guidotti
◦ 2-months-of-imports
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This paper provides an evaluation of optimal
international reserve hoardings in Croatia
◦ Policy implication
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The findings of strong accumulation of
international reserves in Croata are consistent
with a precautionary motive
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Lacking of a background of Croatia economy
◦ Floating with a Large Life Jacket: Monegary
and Exchange Rate Policies in Croatia Under
Dollarization (Vedran Šošič and Evan Kraft ,
2006)
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Without related background, the contribution
of the paper can not be asserted
◦ Why Croatia?
◦ Why a dollarized economy?
◦ What is the specialty about Croatia?
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Any optimal model weighs cost and benefit
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There is some inconsistence in the content
◦ “Our framework builds on…from a prudential
perspective instead of costs and benefits analyses of
reserve accumulation..” (pp., 2)
◦ “This optimality condition balances benefits and costs of
holding reserves…” (pp., 16)
◦ Need to explain a bit on the costs and benefits,
especially in a dollarized economy
 For example, in a highly dollarized economy, monetary
policy is concerned with financial stability first and
secondarily with output stabilization. This constitutes the
cost of dollarization. Holding more international reserves
can partially offset the inflexibility of monetary policy
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nonlinearity
◦ Cost-benefit framework seeks the optimum when
marginal benefit equals marginal cost
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Why international reserves in Croatia
continuously increase even when the actual
reserves are above the optimal level?
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Precautionary motive
◦ Crisis mitigation
 This paper only deals with this perspective
 The probability of sudden stop is exogenous
◦ Crisis prevention
 The probability of sudden stop is a function of international
reserves, thus becomes endogenous
 International Reserves in Emerging Market Countries: Too
Much of a Good Things? (Oliver Jeanne, 2007)
◦ The paper needs to clearly identify which motive it is
dealing with
 The model implies that central bank needs to be ready… to
prevent the crisis a central bank needs to hold…” (pp., 17)
 There is some inconsistence here
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This paper is solely based on precautionary
motive
◦ Foreign reserves were covering more than 100% of
short-term debt (pp., 5)
◦ During the whole period foreign reserves were
covering only half of the euro deposits (pp., 5)
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Are there any alternative explanations?
◦ The results can not be fully explained by
precautionary motive
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The economy is populated by a representative
consumer who holds a certain amount of
foreign assets
“only euro household deposits that are
withdrawn from banking system will not be
used as a buffer against sudden stop effects,”
(pp.,10)
 What is the difference of household and corporate here
by definition? (It is unclear)
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The equation appears to be problematic (pp., 13)
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This paper distinguishes itself with Goncalves
(2007) paper in that “the model occurs as a
result of the loss of households’ confidence
in comparison to nonresident deposits
withdrawal in Goncalves (2007)” (pp., 8)
Is it appropriate to identify the start/end of
crisis based on “the peak and the trough of
non-residential deposits?”
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References
Aizenman, J. and Lee, J. (007). "International Reserves: Precautionary Versus
Mercantilist Views, Theory and Evidence." Open Economic Review, Vol.18, pp.
191-214.
Aizenman, J. and Lee, J. (2008). "Financial versus Monetary Mercantilism: Long-run
View of Large International Reserves Hoarding." The World Economy, pp. 593-611.
Goncalves, F. M. (2007). "The Optimal level of Foreign Reserves in Financially
Dollarized Economies: The Case of Uruguay." IMF Working Paper, pp.
Jeanne, O. (2007). "International Reserves in Emerging Market Countries: Too
Much of a Good Things?" Brookings Paper on Economic Activity, Vol.1, pp. 1-79.
Šošič, V. and Kraft, E. (2006). "Floating with a Large Life Jacket: Monegary and
Exchange Rate Policies in Croatia Under Dollarization." Contemporary Economic
Policy, Vol.24, No.4,pp. 492-506.
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