Demand for International Foreign Reserves

This book tests three alternative models of the §determinants of international reserves: a model §derived from the monetary approach to the balance of §payments, a model derived from the buffer stock §approach to the reserves,and a composite model based §upon the buffer stock approach that allows for an §indirect test of the monetary approach to explain §international reserves.§Oil-exporting countries, due to many misconceptions, §have been ignored in studies of the demand for §foreign reserves. Kuwait, the Netherlands, Norway, §Saudi Arabia, and Venezuela are examined in this §thesis on an individual basis. The results support §the buffer model hypothesis, indicating that the §movement of foreign reserves responds negatively to §the increase of import and opportunity costs and §positively to the increase of uncertainty and the §propensity to import. However, the core of the §monetary approach hypothesis has been found to be §very effective. That is, disequilibrium in the money §market affects the level of the reserves in each §country, but differs in magnitude from country to §country depending on the level of sterilization and §the exchange rate regime.