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Holding International Reserves in an Era of High Capital Mobility

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  • Robert P. Flood
  • Nancy P. Marion

Abstract

Why do countries hold so much international reserves? Global reserve holdings (excluding gold) were equivalent to 17 weeks of imports at the end of 1999. That is almost double what they were at the end of 1960 and about 20 percent higher than they were at the start of the 1990s. In this paper we study countries’ reserve holdings in light of both the increased financial volatility experienced in the last decade and diminished adherence to fixed exchange rates. We find that buffer-stock reserve models work about as well in the modern floating-rate period as they did during the Bretton Woods regime. During both periods, however, the models’ fundamentals explain only a small portion (10-15 percent) of reserves volatility.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/62.

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Length: 53
Date of creation: 01 Apr 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/62

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  1. Claassen, Emil-Maria, 1975. "Demand for International Reserves and the Optimum Mix and Speed of Adjustment Policies," American Economic Review, American Economic Association, American Economic Association, vol. 65(3), pages 446-53, June.
  2. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(1), pages 148-66, February.
  3. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
  4. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  6. Lizondo, JoseSaul & Mathieson, Donald J., 1987. "The stability of the demand for international reserves," Journal of International Money and Finance, Elsevier, Elsevier, vol. 6(3), pages 251-282, September.
  7. Levy, Victor, 1983. "Demand for international reserves and exchange-rate intervention policy in an adjustable-peg economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 11(1), pages 89-101.
  8. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  9. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(362), pages 507-14, June.
  10. Hamada, Koichi & Ueda, Kazuo, 1977. "Random Walks and the Theory of the Optimal International Reserves," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 87(348), pages 722-42, December.
  11. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 81, Board of Governors of the Federal Reserve System (U.S.).
  12. Grimes, Arthur, 1993. "International Reserves under Floating Exchanges Rates: Two Paradoxes Explained," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 69(207), pages 411-15, December.
  13. Frenkel, Jacob A, 1974. "The Demand for International Reserves by Developed and Less-Developed Countries," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 41(161), pages 14-24, February.
  14. Detragiache, Enrica, 1996. "Fiscal Adjustment and Official Reserves in Sovereign Debt Negotiations," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 63(249), pages 81-95, February.
  15. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 9(4), pages 1148-66, December.
  16. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, Elsevier, vol. 33(3-4), pages 345-362, November.
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