A new framework for analyzing adequate and excessive reserve levels under high capital mobility

We use adequate and excessive reserve levels in our title rather than the traditional ‘optimal’ levels of reserves for a specific theoretical reason. Traditional models of optimal reserve holdings focus on the equation of themarginal costs and benefits of holding a particular level of reserves. In our analysis we focus as well on the costs of acquiring and reducing reserve levels. Often these costs can be quite important and as a result there can be a wide range over which deviations of reserve levels from their optimal values should induce no action by the countries to adjust its reserve levels.