Working Paper: NBER ID: w1063
Authors: Sebastian Edwards
Abstract: In this paper the relationship between the demand for international reserves and exchange rate adjustments is empirically investigated for agroup of LDC's. It is shown that countries that have maintained a fixed exchange rate for a long period of time have a different demand function than countries that have occasionally used exchange rate adjustments for correcting payments imbalances. The dynamics of the adjustment for both groupsof countries are also analyzed. The results show that while both groups tend to eliminate reserve disequilibria fast, those countries that have maintained a fixed rate tend to do it more slowly than countries that have occasionally devalued their currency. It Is also shown that the year prior to a devaluation, international reserves have been, on average, 30% below their short-run desired level. These results are important since they indicate that not all LDC's should be aggregated for prediction purposes. The results also have implications for the analysis of the adequacy of international reserves in less developed countries.
Keywords: International Reserves; Exchange Rate Adjustments; Less Developed Countries
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate policy (F31) | demand for international reserves (F31) |
| fixed exchange rates (F31) | demand for international reserves (F31) |
| devaluation (F31) | demand for international reserves (F31) |
| fixed exchange rates (F31) | speed of adjustment in reserve levels (F32) |
| devaluation (F31) | speed of adjustment in reserve levels (F32) |
| year prior to devaluation (F31) | reserves level (Q20) |