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The Demand for International Reserves and Monetary Equilibrium: Some Evidence From Developing Countries

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Sebastian Edwards

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Abstract

Traditionally, two alternative explanations have been offered for the behavior of international reserves through time. On the one hand, the literature on the demand for international reserves postulates that reserves movements respond to discrepancies between desIred and actual reserves. Onthe other hand, according to the monetary approach to the balance of payments,changes in international reserves will be related to excess demands or excess supplies for money. The purpose of this paper is to empirically integrate these two basic explanations for international reserves movements. This is done by estimating a dynamic equation that explicitly allows reserves movements to reflect the monetary authority's excess demand for international reserves, and the public's excess demand for money. The results obtained,using a sample of 23 developing countries that maintained a fixed exchange rate during period 1965-1972, confirm the hypothesis that reserves movements respond both to monetary factors and to differences between actual and desired reserves. These results indicate that the exclusion of monetary considerations from the dynamic analysis of international reserves will yield biased coefficients.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1307.

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Date of creation: Oct 1984
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Handle: RePEc:nbr:nberwo:1307

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-66, December. [Downloadable!] (restricted)
  2. Levy, Victor, 1983. "Demand for international reserves and exchange-rate intervention policy in an adjustable-peg economy," Journal of Monetary Economics, Elsevier, vol. 11(1), pages 89-101. [Downloadable!] (restricted)
  3. 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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  4. 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)
  5. 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)
  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. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-67, September. [Downloadable!] (restricted)
  9. 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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  1. Zarate, Cristina A., 2008. "Una Nota sobre Reserva Óptima y Riesgo Soberano: el caso Argentino 1997-2007
    [A note on optimal reserves and sovereign risk: Argentina's case 1997-2007]    ," MPRA Paper 12086, University Library of Munich, Germany. [Downloadable!]
  2. Michael D. Bordo & Ronald MacDonald & Michael J. Oliver, 2009. "Sterling in crisis: 1964-1967," NBER Working Papers 14657, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Prabheesh, K P & Malathy, D & Madhumathi, R, 2007. "Demand for Foreign Exchange Reserves in India: A Co-integration Approach," MPRA Paper 13969, University Library of Munich, Germany. [Downloadable!]
  4. 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, vol. 8(15), pages 117-159, July-Dece. [Downloadable!]
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