Dynamic Adjustment and the Demand for International Reserves / John F. O. Bilson, Jacob A. Frenkel.

Format:

Book

Author/Creator:

Bilson, John F. O.

Contributor:

National Bureau of Economic Research.

Frenkel, Jacob A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0407.

NBER working paper series no. w0407

Language:

English

Subjects (All):

Banks and banking, Central.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1979.

Cambridge, Mass. : National Bureau of Economic Research, 1979.

Summary:

Although there have been a large number of empirical studies of the demand for international reserves, there have not been many successful demonstrations that deviations of the actual stock of reserves from the target level defined by the demand function trigger a process of adjustment. This paper presents new evidence which suggests that central banks do have a target level of international reserve holdings, and that the adjustment of actual reserves towards the target level is quite rapid. In addition, an economic theory of the speed of adjustment is presented and tested. The evidence suggests that central banks adjust more rapidly to reserve deficiencies than to surpluses, that the speed of adjustment is positively related to the divergence between the actual level of reserves and the target level, and that countries which hold abnormally large quantities of reserves do so, in part, in order to adjust more slowly. Finally, the paper examines the applicability of the model to the current regime of managed flexible exchange rates. The evidence suggests that the move towards greater exchange rate flexibility has not significantly altered the reserve holding behavior of the world's central banks.

Notes:

Print version record

November 1979.