Role of Foreign Exchange Reserve in Exchange Rate Behaviour the Persisting Asymmetry: A Historical Account

Abstract

Foreign exchange and monetary gold reserve is a very important factor to determine nominal exchange rate for the countries whose currency has very little use as reserve currency. Whereas, for the reserve currency countries it is not so important -it is primarily because of their greater money pulling power internationally through rate of interest change. They have this power because their currencies are having greater use as international money. Though the international monetary systems have changed from fixed exchange rate of Gold Standard period to independent float or managed float exchange rate systems of today's world, this asymmetry between the reserve currency countries and the other countries has not change. Though, ideally under flexible exchange rate system, the importance of foreign exchange reserve in determining nominal exchange rate should be very little. This paper takes an historical review of all the International Monetary System to establish the importance of foreign exchange reserve in determining exchange rate for developing countries; but it is not be the case with the reserve currency countries.