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

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  • Sebastian Edwards

Abstract

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.

Suggested Citation

  • Sebastian Edwards, 1985. "On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Coutries," NBER Working Papers 1532, National Bureau of Economic Research, Inc.
  • 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 1148-1166, December.
    3. 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 612-614, November.
    4. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-337, May.
    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. 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.
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    8. 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 614-615, November.
    9. 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.
    10. 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.
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    Cited by:

    1. Jeanne, Olivier, 2012. "The dollar and its discontents," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 1976-1989.
    2. Marc-André Gosselin & Nicolas Parent, 2005. "An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia," Staff Working Papers 05-38, Bank of Canada.
    3. Olivier Jeanne, 2013. "Capital Account Policies and the Real Exchange Rate," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 7-42.
    4. GBANDI, Tchapo, 2016. "Ratios d’adéquation et fonction de demande des réserves de change dans les pays de l’UEMOA
      [Title: Foreign reserve adequacy ratios and reserve demand function in WAEMU countries]
      ," MPRA Paper 82145, University Library of Munich, Germany, revised 25 Jun 2016.
    5. Mohsen Bahmani-Oskooee & Farhang Niroomand, 1989. "On the exchange-rate elasticity of the demand for international reserves: Some evidence from industrial countries: A reply," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 125(2), pages 394-396, June.
    6. Chandan Sharma & Sunny K Singh, 2014. "Determinants of International Reserves: Empirical Evidence from Emerging Asia," Economics Bulletin, AccessEcon, vol. 34(3), pages 1696-1703.
    7. Dreher, Axel & Vaubel, Roland, 2009. "Foreign exchange intervention and the political business cycle: A panel data analysis," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 755-775, September.
    8. Jeanne, Olivier & Sandri, Damiano, 2016. "Optimal Reserves in Financially Closed Economies," CEPR Discussion Papers 11200, C.E.P.R. Discussion Papers.
    9. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, vol. 121(555), pages 905-930, September.
    10. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
    11. Sunil Sharma & Woon Gyu Choi & Maria Strömqvist, 2007. "Capital Flows, Financial Integration, and International Reserve Holdings; The Recent Experience of Emerging Markets and Advanced Economies," IMF Working Papers 07/151, International Monetary Fund.
    12. Martín Redrado & Jorge Carrera & Diego Bastourre & Javier Ibarlucia (ed.), 2006. "The Economic Policy of Foreign Reserve Accumulation: New International Evidence," BCRA Paper Series, Central Bank of Argentina, Economic Research Department, number 02, December.
    13. Martín Redrado & Jorge Carrera & Diego Bastourre & Javier Ibarlucia, 2006. "The Economic Policy of Foreign Reserve Accumulation: New International Evidence," BCRA Working Paper Series 200614, Central Bank of Argentina, Economic Research Department.
    14. repec:eee:jimfin:v:74:y:2017:i:c:p:371-385 is not listed on IDEAS
    15. Bar-Ilan, Avner & Marion, Nancy P. & Perry, David, 2007. "Drift control of international reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3110-3137, September.
    16. repec:rss:jnljef:v5i2p4 is not listed on IDEAS
    17. Hee-Ryang Ra, 2008. "Dilution of Opportunity Cost Effect on the Demand for International Reserves in the High Reserve Era," Korean Economic Review, Korean Economic Association, vol. 24, pages 151-171.
    18. Christopher Ball & Javier Reyes, 2009. "International reserve holdings: interest rates matter!," Applied Economics Letters, Taylor & Francis Journals, vol. 16(4), pages 343-348.
    19. Shijaku, Gerti & Dushku, Elona, 2017. "Foreign reserve holdings: an extended study through risk-inspired motives," MPRA Paper 79199, University Library of Munich, Germany.
    20. Lehto, Taru, 1994. "The level of a central bank's international reserves : theory and cross-country analysis," Research Discussion Papers 15/1994, Bank of Finland.
    21. Biljana Jovanovikj & Danica Unevska Andonova, 2017. "The Optimal Level of Foreign Reserves in Macedonia," Working Papers 2017-05, National Bank of the Republic of Macedonia.
    22. Shijaku, Gerti, 2012. "Optimal level of reserve holding: an empirical investigation in the case of Albania," MPRA Paper 79091, University Library of Munich, Germany.
    23. Ramachandran, M., 2006. "On the upsurge of foreign exchange reserves in India," Journal of Policy Modeling, Elsevier, vol. 28(7), pages 797-809, October.

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