Working Paper: NBER ID: w1532
Authors: Sebastian Edwards
Abstract: Contrary to what is suggested by the theory, most empirical studies on the demand for international reserves have failed to find a significant(negative) coefficient for the opportunity cost of holding reserves. In this paper it is argued that the reason for this is that the opportunity cost of holding international reserves has been measured incorrectly. In the empirical analysis presented in this paper the spread between the interest rate at which countries can borrow from abroad and LIBOR is used as a proxy for the net opportunity cost for holding reserves. The results obtained using data for a group of developing countries for 1976-198O show that when this net opportunity cost is used, the regression coefficient is significantly negative.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| net opportunity cost of holding international reserves (F31) | demand for international reserves (F31) |
| increase in net opportunity cost of holding international reserves (F31) | decrease in demand for international reserves (F31) |
| income (E25) | demand for international reserves (F31) |
| variability of export earnings (F14) | demand for international reserves (F31) |