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International Liquidity and Monetary Control

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  • Jacob A. Frenkel

Abstract

This paper deals with the relations among international liquidity,the exchange-rate regime and the effectiveness of monetary policy. The first part of the paper contains an empirical study of the demand for international reserves. It is shown that (i) reserve holdings are a stable function of a limited number of economic variables, and(ii) the move togreater flexibility of exchange-rates has not changed drastically the patterns of reserves holdings. The empirical work deals with developed and developing countries and it allows for country-specific and time-specific factors as well as for dynamic adjustments. The second part of the paper deals with the more general issue of the constraints that the openness of the economy imposes on the effectiveness and proper conduct of monetary policy, as well as the dependence of these constraints on the exchange-rate regime. In this context the roles of various exchange-market inter-ventions are discussed. The analysis then explores alternative guidelines for monetary policy where it is argued that the conduct of policy can be improved by paying attention to the relation between exchange rates and interest rates. This relation is then used to interpret the recent evolutionof interest rates. The paper concludes with a brief discussion of the role of the International Monetary Fund in the provision of liquidity.

Suggested Citation

  • Jacob A. Frenkel, 1983. "International Liquidity and Monetary Control," NBER Working Papers 1118, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1118
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    Cited by:

    1. Sebastian Edwards, 1985. "The Pricing of Bonds and Bank Loans in International Markets: An Empirical Analysis of Developing Countries," UCLA Economics Working Papers 382, UCLA Department of Economics.
    2. Aizenman, Joshua & Lee, Yeonho & Rhee, Youngseop, 2007. "International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 1-15, March.
    3. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, July.
    4. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation 1976-1980," UCLA Economics Working Papers 298, UCLA Department of Economics.
    5. Yener Altunbas & Blaise Gadanecz, 2004. "Developing Country Economic Structure and the Pricing of Syndicated Credits," Journal of Development Studies, Taylor & Francis Journals, vol. 40(5), pages 143-173.
    6. Aizenman, Joshua & Sun, Yi, 2012. "The financial crisis and sizable international reserves depletion: From ‘fear of floating’ to the ‘fear of losing international reserves’?," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 250-269.
    7. Cheung, Yin-Wong & Sengupta, Rajeswari, 2011. "Accumulation of reserves and keeping up with the Joneses: The case of LATAM economies," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 19-31, January.
    8. Jorge Braga de Macedo, 1984. "Trade and Financial Interdependence Under Flexible Exchange Rates: The Pacific Area," NBER Working Papers 1517, National Bureau of Economic Research, Inc.
    9. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.
    10. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
    11. Flôres Junior, Renato Galvão & Araújo, Carlos Hamilton Vasconcelos, 2002. "Foreign funding to an emerging market: the Monetary Premium Theory and the Brazilian Case, 1991 - 1998," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 459, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    12. Rudiger Dornbusch & Jeffrey Frankel, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," International Economic Association Series, in: Silvio Borner (ed.), International Finance and Trade in a Polycentric World, chapter 7, pages 151-208, Palgrave Macmillan.
    13. Jelena Laušev & Aleksandar Stojanović & Nataša Todorović, 2011. "Determinants Of Debt Rescheduling In Eastern European Countries," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 56(188), pages 7-31, January –.
    14. Mr. Joshua Aizenman & Mr. Jaewoo Lee, 2005. "International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence," IMF Working Papers 2005/198, International Monetary Fund.
    15. Mei-yin Lin, 2011. "Foreign Reserves and Economic Growth: Granger Causality Analysis with Panel Data," Economics Bulletin, AccessEcon, vol. 31(2), pages 1563-1575.
    16. Edwards, Sebastian, 1986. "The pricing of bonds and bank loans in international markets : An empirical analysis of developing countries' foreign borrowing," European Economic Review, Elsevier, vol. 30(3), pages 565-589, June.
    17. William Miles, 2000. "The pricing of risk in emerging credit markets: Bonds versus loans," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(2), pages 221-231, May.
    18. Huang, Tai-Hsin & Shen, Chung-Hua, 1999. "Applying the seasonal error correction model to the demand for international reserves in Taiwan," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 107-131, January.
    19. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    20. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.

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