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An Assessment of Reserve Adequacy in Caribbean Economies

Caribbean economies face a binding foreign exchange constraint that requires prudent management of foreign reserves for protection against external shocks and to engender market stability and confidence. This paper assesses the adequacy of foreign exchange reserves in the Caribbean over the period 1981-2011. It uses the informal method of ratio analysis, the combined factor measure of reserve adequacy for small islands proposed by Mwase (2012),compares actual and forecasted reserves from a reserve demand specification and applies the optimisation frameworks of Jeanne (2007), Jeanne and Rancier (2006) and Barnichon (2009). The findings were that while some countries held adequate reserves for most of the period under study, while other nations were faced with periods of insufficient reserves, particularly during the 1980s to mid-1990s when Caribbean countries experienced various external shocks. This suggests that the region needs to exercise prudence in managing its foreign exchange reserves.

An Assessment of Reserve Adequacy in Caribbean Economies