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On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Coutries

  • Sebastian Edwards

Contrary to what is suggested by the theory, most empirical studies on the demand for international reserves have failed to find a significant(negative) coefficient for the opportunity cost of holding reserves. In this paper it is argued that the reason for this is that the opportunity cost of holding international reserves has been measured incorrectly. In the empirical analysis presented in this paper the spread between the interest rate at which countries can borrow from abroad and LIBOR is used as a proxy for the net opportunity cost for holding reserves. The results obtained using data for a group of developing countries for 1976-198O show that when this net opportunity cost is used, the regression coefficient is significantly negative.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1532.

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Date of creation: Jan 1985
Date of revision:
Publication status: published as Edwards, Sebastian. "On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Countries," Journal of International Money and Finance, Vol. 4, No. 3, pp. 287-295. (June 1985)
Handle: RePEc:nbr:nberwo:1532
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  1. von Furstenberg, George M., 1982. "New estimates of the demand for non-gold reserves under floating exchange rates," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 81-95, January.
  2. 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.
  3. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
  4. Michael R. Darby, 1983. "The United States as an Exogenous Source of World Inflation under the Bretton Woods System," NBER Chapters, in: The International Transmission of Inflation, pages 478-490 National Bureau of Economic Research, Inc.
  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. Peter B. Clark, 1970. "Demand for International Reserves: A Cross-Country Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 3(4), pages 577-94, November.
  7. Hipple, F Steb, 1979. "A Note on the Measurement of the Holding Cost of International Reserves," The Review of Economics and Statistics, MIT Press, vol. 61(4), pages 612-14, November.
  8. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
  9. 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.
  10. Shinkai, Yoichi, 1979. "Demand for International Reserves in Less Developed Countries: A Comment," The Review of Economics and Statistics, MIT Press, vol. 61(4), pages 614-15, November.
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