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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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    File URL: http://www.nber.org/papers/w1118.pdf
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    References listed on IDEAS

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    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 1148-1166, December.
    2. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-381, May.
    3. John H. Makin, 1986. "Exchange Rate Targets: Desirable or Disastrous?," Books, American Enterprise Institute, number 52129, July.
    4. G. C. Archibald & J. Richmond, 1971. "On the Theory of Foreign Exchange Reserve Requirements," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 245-263.
    5. 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.
    6. Frenkel, Jacob A. & Hakkio, Craig S., 1980. "Country-specific and time-specific factors in the demand for international reserves," Economics Letters, Elsevier, vol. 5(1), pages 75-80.
    7. Peter B. Clark, 1970. "Demand for International Reserves: A Cross-Country Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 3(4), pages 577-594, November.
    8. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-514, June.
    9. Emil-Maria Claassen, 1974. "The optimizing approach to the demand for international reserves," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 110(3), pages 353-398, September.
    10. Frenkel, Jacob A & Mussa, Michael L, 1981. "Monetary and Fiscal Policies in an Open Economy," American Economic Review, American Economic Association, vol. 71(2), pages 253-258, May.
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    Citations

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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. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation 1976-1980," UCLA Economics Working Papers 298, UCLA Department of Economics.
    3. 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.
    4. 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.
    5. 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.
    6. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
    7. 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.
    8. 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.
    9. Germán Reyes & Facundo Sirimarco, 2015. "Kicking the Board: Emerging Economies as an Engine of Global Economy and its Institutions," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(72), pages 185-214, June.

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