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On the Effect of Opportunity Cost on International Reserve Holdings

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  • Ben-Bassat, Avraham
  • Gottlieb, Daniel

Abstract

The opportunity cost of holding international reserves plays a central role in all models of optimal demand for foreign exchange. This cost is conventionally defined as the difference between the yield on reserves and the marginal productivity forgone from an alternative investment in fixed capital. Most empirical studies have failed to find a significant opportunity-cost effect, since none of them measure it in accordance with its theoretical definition. The results for Israel show that, when this cost is measured properly, it turns out to be a crucial determinant of reserve demand. Copyright 1992 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 74 (1992)
Issue (Month): 2 (May)
Pages: 329-32

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Handle: RePEc:tpr:restat:v:74:y:1992:i:2:p:329-32

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Yan Zhou, 2009. "International Reserves and Fiscal Policy in Developing Countries," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 17(5), pages 942-960, November.
  2. Suheyla Ozyildirim & Bulent Yaman, 2005. "Optimal versus adequate level of international reserves: evidence for Turkey," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(13), pages 1557-1569.
  3. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  4. Camilo González & Luisa F. Silva & Carmiña O. Vargas & Andrés M. Velasco, 2013. "An exploration on interbank markets and the operational framework of monetary policy in Colombia," Borradores de Economia, Banco de la Republica de Colombia 782, Banco de la Republica de Colombia.
  5. Javier Gómez Restrepo & Juan Sebastián Rojas Bohorquez, 2013. "Assessing Reserve Adequacy: The Colombian Case," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 010981, BANCO DE LA REPÚBLICA.
  6. Mendoza, Ronald U., 2010. "Was the Asian crisis a wake-up call?: Foreign reserves as self-protection," Journal of Asian Economics, Elsevier, Elsevier, vol. 21(1), pages 1-19, February.
  7. Marco Antônio F. de H. Cavalcanti & Christian Vonbun, 2007. "Reservas internacionais ótimas para o Brasil: uma análise simples de custo-benefício para o período 1999-2007," Discussion Papers, Instituto de Pesquisa Econômica Aplicada - IPEA 1315, Instituto de Pesquisa Econômica Aplicada - IPEA.
  8. Sula, Ozan, 2008. "Demand for International Reserves: A Quantile Regression Approach," MPRA Paper 11680, University Library of Munich, Germany.
  9. Ramachandran, M., 2006. "On the upsurge of foreign exchange reserves in India," Journal of Policy Modeling, Elsevier, Elsevier, vol. 28(7), pages 797-809, October.
  10. David Fernando López Angarita, 2006. "Nivel de reservas internacionales y riesgo cambiario en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 117-159, July-Dece.
  11. Mariusz A. Sumlinski, 2008. "International Reserves-Too Much of a Zipf's Thing," IMF Working Papers, International Monetary Fund 08/11, International Monetary Fund.
  12. Ramachandran, M. & Srinivasan, Naveen, 2007. "Asymmetric exchange rate intervention and international reserve accumulation in India," Economics Letters, Elsevier, Elsevier, vol. 94(2), pages 259-265, February.
  13. Christopher J. Neely, 2000. "Are changes in foreign exchange reserves well correlated with official intervention?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 17-32.
  14. Javier Gómez Restrepo & Juan Sebastián Rojas Bohórquez, 2013. "Assessing Reserve Adequacy: The Colombian Case," Borradores de Economia, Banco de la Republica de Colombia 781, Banco de la Republica de Colombia.

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