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The effect of multilateral trade clearinghouses on the demand for international reserves

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  • Ellen E. Meade

Abstract

This paper attempts to capture the portfolio incentives for central bank participation in a multilateral trade clearinghouse and to discuss the relation of those incentives to the volume of trade. Clearing­houses for the netting of multilateral intra-regional trade have existed since the 1950s, but no work to date has attempted to explore the incentive effects of such arrangements. Instead previous work, primarily empirical, has focused on the tendency of preferential arrangements (clearing as well as favorable protectionist policies) between nations to encourage trade flows between them. This paper advances the notion that the effects of clearing arrangements must be modelled as a portfolio choice problem, in order to ascertain the precise influence of clearing alone. ; The model developed here describes the choice of the central bank between holding reserve balances and investing in productive assets. For a given distribution of net export receipts and a given cash management policy of the central bank, expected daily demand for international reserves is derived. This demand is re-derived to illustrate the effects of a clearing­house; in addition, reserve demand is augmented to account for debt payments to external creditors. ; Regardless of whether the central bank makes external debt pay­ments, the clearing arrangement reduces the demand for reserves to finance trade. It is possible, were the "freed" reserves invested in development of the export industry, that the clearing arrangement could translate into an increased volume of trade. If the country is burdened with external debt payments however, it is possible that the "freed" reserves would simply be used to increase payments to external creditors.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1987/310/ifdp310.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 310.

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Date of creation: 1987
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Handle: RePEc:fip:fedgif:310

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Related research

Keywords: Clearinghouses (Banking) ; International trade ; Payment systems;

References

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  1. H. Robert Heller, 1968. "The Transactions Demand for International Means of Payments," Journal of Political Economy, University of Chicago Press, vol. 76, pages 141.
  2. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  3. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-67, September.
  4. Hamada, Koichi & Ueda, Kazuo, 1977. "Random Walks and the Theory of the Optimal International Reserves," Economic Journal, Royal Economic Society, vol. 87(348), pages 722-42, December.
  5. Black, Stanley W., 1985. "International money and international monetary arrangements," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 22, pages 1153-1193 Elsevier.
  6. Olivera, Julio H G, 1969. "A Note on the Optimal Rate of Growth of International Reserves," Journal of Political Economy, University of Chicago Press, vol. 77(2), pages 245-48, March/Apr.
  7. Merton H. Miller & Daniel Orr, 1968. "The Demand For Money By Firms: Extensions Of Analytic Results," Journal of Finance, American Finance Association, vol. 23(5), pages 735-759, December.
  8. Brada, Josef C & Mendez, Jose A, 1983. "Regional Economic Integration and the Volume of Intra-Regional Trade: A Comparison of Developed and Developing Country Experience," Kyklos, Wiley Blackwell, vol. 36(4), pages 589-603.
  9. Britto, Ronald & Heller, H Robert, 1973. "International Adjustment and Optimal Reserves," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(1), pages 182-95, February.
  10. Clark, Peter B, 1970. "Optimum International Reserves and the Speed of Adjustment," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 356-76, March-Apr.
  11. Peter B. Clark, 1970. "Demand for International Reserves: A Cross-Country Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 3(4), pages 577-94, November.
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