International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz
THE NEED TO MAINTAIN MONETARY RESERVES ( ...continuation )

Figure 2. Price of gold, 1980-2010 (US dollars and percentage variation)
Source: Compiled by authors using data from IHS, Global Insight (2010).

CENTRAL BANKS DEMAND FOR INTERNATIONAL RESERVES

Central banks demand currencies and accumulate them on the basis of their general monetary policy, taking into account their level of global integration to make efficient use of their international assets (IR*) and to respond to their trade and financial commitments. These IR must essentially be managed to minimize or correct any trade imbalances. Theoretically, the issuing institution will demand currencies for various reasons, and which may be described as follows:

  1. For liquidity: to support the national currency and guarantee the payment of foreign obligations, which helps improve the perception of the countrys risk and also improve the conditions under which the country can access international markets;
  2. As a precaution: to protect the country against possible speculative attacks on its currency or debts, as well as external shocks to the current and capital account, which helps improve its credibility and hence the effectiveness of monetary policy; and
  3. finally, for profitability: to increase profits through a more efficient management of investments in international reserves, which must be invested in bonds that are highly liquid.

There are currently some interesting aspects to the study of the volume of IR which various economies must possess: a) The amount of reserves is a pool of external assets, considered as an inventory problem. b) Monetary reserves provide liquidity services in currencies. c) The main benefit of IR is as a precautionary measure, in other words, as insurance. d) However, various costs are associated with acquiring and maintaining an IR balance. e) Some analytical models on the optimality of IR also reflect various states of integration into the international markets and the sources of variability in the balance of payments.