Brazilian Foreign Reserves: Fiscal Costs and Optimal Levels

Abstract

This paper presents estimates of the optimal level of foreign reserves for Brazil between the first quarter of 1998 and the last quarter of 2008, by applying the Jeanne e Ranciére (2006) methodology, under different scenarios. It also reports estimates of the fiscal costs of holding this asset, as well as the eventual excessive costs or savings due to differences between the actual and the optimal reserves holdings by the Brazilian Central Bank. The results suggest that, under the most likely scenarios and assumptions regarding the model’s main parameters, the observed level of reserves in Brazil has recently risen slightly above the optimal level. A return to the recent trend of massive reserve accumulation may generate high and increasing costs for the Brazilian government and tax payers.