The Demand for International Reserves and Exchange Rate Adjustments: TheCase of LDCs, 1964-1972

Abstract

In this paper the relationship between the demand for international reserves and exchange rate adjustments is empirically investigated for a group of LDC's. It is shown that countries that have maintained a fixed exchange rate for a long period of time have a different demand function than countries that have occasionally used exchange rate adjustments for correcting payments imbalances. The dynamics of the adjustment for both groups of countries are also analyzed. The results show that while both groups tend to eliminate reserve disequilibria fast, those countries that have maintained a fixed rate tend to do it more slowly than countries that have occasionally devalued their currency. It Is also shown that the year prior to a devaluation, international reserves have been, on average, 30% below their short-run desired level. These results are important since they indicate that not all LDC's should be aggregated for prediction purposes. The results also have implications for the analysis of the adequacy of international reserves in less developed countries.

Causality Between Exchange Rates and Foreign Exchange Reserves: Serbian Case

“…In the absence of reserves, balance of payment deficits would have to be rectified through (Aizenman et al, 2012): a reduction in aggregate expenditures, imposition of macroeconomic adjustment costs, and a change in relative prices or "expenditure switching". Edwards (1983) claims, based on the examination of previous studies, that demand for international reserves is a function of the scale of the country (measured by its total imports or total income), the variability of its payments, its degree of openness and the opportunity cost of holding reserves. The reserves are kept to finance international transactions, and also as a buffer stock to deal with unanticipated payment difficulties.…”