The Demand for International Reserves in LDCs

Graham Bird

Chapter 5 in The International Monetary System and the Less Developed Countries, 1982, pp 82-113 from Palgrave Macmillan

Abstract: Abstract International reserves may be defined as ‘those assets of [a country’s] monetary authorities that can be used, directly or through assured convertibility into other assets, to support its rate of exchange when its external payments are in deficit’ (Group of Ten, 1964). The precise classification of reserves is, in fact, rather arbitrary, although reserves are conventionally defined to incorporate gold, convertible foreign exchange, Reserve Positions in the IMF and Special Drawing Rights (SDRs). International liquidity is a rather wider concept than reserves and may theoretically be defined as access to the means of international settlement. From a functional point of view the liquidity available to a country is, in principle, measured by its ability to finance a balance-of-payments deficit without having to resort to adjustment. Operationally, therefore, a country’s liquidity position should perhaps include not only the customary forms of reserve assets, but also items such as its ability to borrow, the foreign-exchange holdings of its commercial banks, the willingness of foreigners to hold its currency in the event of a payments deficit, and the extent to which increases in interest rates or changes in the term structure of interest rates would encourage a capital inflow without also having undesired domestic repercussions. International liquidity will therefore tend to exceed international reserves. Assuming that a country’s access to the international means of settlement will in part be free of conditions, and in part not, it would seem sensible to distinguish between conditional and unconditional international liquidity. For LDCs in particular, the conditionality of liquidity may be very significant.

Keywords: Opportunity Cost; Foreign Exchange; Monetary Authority; International Reserve; International Liquidity (search for similar items in EconPapers)
Date: 1982
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DOI: 10.1007/978-1-349-16903-0_5

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