The Demand for International Reserves and Monetary Equilibrium: Some Evidence From Developing Countries / Sebastian Edwards.

By:

Edwards, Sebastian

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w1307.Publication details: Cambridge, Mass. National Bureau of Economic Research 1984.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: Traditionally, two alternative explanations have been offered for the behavior of international reserves through time. On the one hand, the literature on the demand for international reserves postulates that reserves movements respond to discrepancies between desIred and actual reserves. Onthe other hand, according to the monetary approach to the balance of payments,changes in international reserves will be related to excess demands or excess supplies for money. The purpose of this paper is to empirically integrate these two basic explanations for international reserves movements. This is done by estimating a dynamic equation that explicitly allows reserves movements to reflect the monetary authority's excess demand for international reserves, and the public's excess demand for money. The results obtained,using a sample of 23 developing countries that maintained a fixed exchange rate during period 1965-1972, confirm the hypothesis that reserves movements respond both to monetary factors and to differences between actual and desired reserves. These results indicate that the exclusion of monetary considerations from the dynamic analysis of international reserves will yield biased coefficients.

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March 1984.

Traditionally, two alternative explanations have been offered for the behavior of international reserves through time. On the one hand, the literature on the demand for international reserves postulates that reserves movements respond to discrepancies between desIred and actual reserves. Onthe other hand, according to the monetary approach to the balance of payments,changes in international reserves will be related to excess demands or excess supplies for money. The purpose of this paper is to empirically integrate these two basic explanations for international reserves movements. This is done by estimating a dynamic equation that explicitly allows reserves movements to reflect the monetary authority's excess demand for international reserves, and the public's excess demand for money. The results obtained,using a sample of 23 developing countries that maintained a fixed exchange rate during period 1965-1972, confirm the hypothesis that reserves movements respond both to monetary factors and to differences between actual and desired reserves. These results indicate that the exclusion of monetary considerations from the dynamic analysis of international reserves will yield biased coefficients.