ABSTRACT
This chapter examines the experience of 36 small states covering the period 1980–2016 in order to assess the role of international reserves as a cushion against large external shocks. It compares macroeconomic costs of shocks across countries to determine whether such costs vary according to the level of international reserves held prior to a shock event. The chapter provides a brief summary of the existing literature on reserve adequacy. It describes the methodology used to identify shock episodes and assess related macroeconomic costs. The chapter presents some stylized facts pertaining small states during the period 1980–2016. The chapter discusses the results of the event-study analysis for small states, and the potential role played by international reserve holdings in cushioning the economy from external shocks. The macroeconomic impact associated with natural disasters appears to be short-lived on economic activity and more durable on fiscal and the current account balances.
