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The Demand for International Reserves and Exchange Rate Adjustments: TheCase of LDCs, 1964-1972

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Sebastian Edwards

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Abstract

In this paper the relationship between the demand for international reserves and exchange rate adjustments is empirically investigated for agroup of LDC's. It is shown that countries that have maintained a fixed exchange rate for a long period of time have a different demand function than countries that have occasionally used exchange rate adjustments for correcting payments imbalances. The dynamics of the adjustment for both groupsof countries are also analyzed. The results show that while both groups tend to eliminate reserve disequilibria fast, those countries that have maintained a fixed rate tend to do it more slowly than countries that have occasionally devalued their currency. It Is also shown that the year prior to a devaluation, international reserves have been, on average, 30% below their short-run desired level. These results are important since they indicate that not all LDC's should be aggregated for prediction purposes. The results also have implications for the analysis of the adequacy of international reserves in less developed countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1063.

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Date of creation: Feb 1984
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Handle: RePEc:nbr:nberwo:1063

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  1. 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. [Downloadable!] (restricted)
  2. Marc Nerlove, 1968. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross-Sections," Cowles Foundation Discussion Papers 257, Cowles Foundation, Yale University. [Downloadable!]
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  3. Frenkel, Jacob A, 1974. "The Demand for International Reserves by Developed and Less-Developed Countries," Economica, London School of Economics and Political Science, vol. 41(161), pages 14-24, February. [Downloadable!] (restricted)
  4. John F. O. Bilson & Jacob A. Frenkel, 1979. "Dynamic Adjustment and the Demand for International Reserves," NBER Working Papers 0407, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. John Makin, 1974. "Exchange rate flexibility and the demand for international reserves," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 110(2), pages 229-243, June. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Edwards, Sebastian, 1980. "A note on the dynamic adjustment of the demand for international reserves by LDC's," Economics Letters, Elsevier, vol. 5(1), pages 71-74. [Downloadable!] (restricted)
  8. Frenkel, Jacob A & Jovanovic, Boyan, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 25-43, August. [Downloadable!] (restricted)
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  9. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-67, September. [Downloadable!] (restricted)
  10. Anderson, T. W. & Hsiao, Cheng., 1980. "Estimation of Dynamic Models with Error Components," Working Papers 336, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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