Demand for international reserves: Adjustment dynamics, 1973-1990
Abstract
Since the breakdown of the Smithsonian agreement, many countries in the world have adopted the system of flexible exchange rates, and experienced greater exchange rate volatility than had previously been anticipated. But, central banks often engage in buying or selling foreign exchange in order to moderate the speed of exchange rate movements. In this managed floating exchange rate system, the significance of international reserves still remains. Existing studies of the demand for reserves, however, have ignored the role of exchange rate flexibility in modeling. In this thesis, the dynamic adjustment equation of international reserves is developed by combining the theory of exchange market intervention with the theory of the demand for international reserves. The model is then estimated with quarterly data from 8 industrial countries that maintained a flexible exchange rate between 1973 and 1990. The results obtained support the hypotheses that: (i) international reserve movements respond both to the gap between desired and actual reserve holdings and to the change in the exchange rate, and the expected value of the coefficient for the exchange-rate smoothing term is negative; (ii) omitting considerations of exchange-rate smoothing term from the dynamic analysis of international reserve holdings yields an upward biased coefficient on the gap between target and actual reserve holdings; (iii) omitting considerations of the gap between desired and actual reserve holdings term from the dynamic analysis of international reserve holdings, i.e., foreign exchange market intervention model yields an downward biased coefficient on the change in the exchange rate. However, the general dynamic adjustment equation of reserve holdings during the sample period remains stable between before and after the Plaza Meeting for all cases except Canada. The general model is less successful with the data from the developing countries, where other considerations need to be introduced to account for changes in reserve holdings.
Degree
Ph.D.
Advisors
Hu, Purdue University.
Subject Area
Economics
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.