On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Coutries

Sebastian Edwards

No 1532, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1985-01
Note: ITI IFM
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Published as Edwards, Sebastian. "On the Interest Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Countries," Journal of International Money and Finance, Vol. 4, No. 3, pp. 287-295. (June 1985)

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Journal Article: On the interest-rate elasticity of the demand for international reserves: Some evidence from developing countries (1985)
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