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International Reserves Under Alternative Exchange Rate Regimes and Aspects of The Economics of Managed Float

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  • Jacob A. Frenkel

Abstract

This paper contains an analysis of the role of international reserves under a regime of pegged exchange rates and under a regime of managed floating. It presents evidence on the stability of the demand for reserves during the periods 1963-72 and 1973-75. It is shown that the demand for reserves by developed countries differs from that of less-developed countries and that the system underwent a structural change by the end of 1972. In view of the drastic change in the international monetary system, the extent of the structural change has not been as large as might have been expected, thus leading to the observation that economic behavior seems to be more stable than legal arrangements. From the policy perspective it follows that the problems concerning the role of the International Monetary Fund in this context are as relevant at the present as they were in the past. The paper concludes with a sketch of a stochastic framework for the analysis of the optimal degree of managed floating. And its purpose is to suggest an additional set of variables which might be incorporated into the specification of the demand for international reserves. It is shown that the optimal degree of exchange rate flexibility depends on the stochastic nature of the shocks that the economy faces. The stochastic characteristics of the shocks include a distinction between real and monetary shocks, domestic and foreign shocks and depend on the covariances among the various shocks.

Suggested Citation

  • Jacob A. Frenkel, 1978. "International Reserves Under Alternative Exchange Rate Regimes and Aspects of The Economics of Managed Float," NBER Working Papers 0287, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0287
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    References listed on IDEAS

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    1. Grubel, Herbert G, 1971. "The Demand for International Reserves: A Critical Review of the Literature," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1148-1166, December.
    2. T. J. Courchene & G. M. Youssef, 1967. "The Demand for International Reserves," Journal of Political Economy, University of Chicago Press, vol. 75(4), pages 404-404.
    3. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. G. C. Archibald & J. Richmond, 1971. "On the Theory of Foreign Exchange Reserve Requirements," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 245-263.
    6. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
    7. repec:bla:scandj:v:78:y:1976:i:2:p:280-304 is not listed on IDEAS
    8. Rudiger Dornbusch & Paul Krugman, 1976. "Flexible Exchange Rates in the Short Run," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 537-584.
    9. repec:bla:scandj:v:78:y:1976:i:2:p:229-48 is not listed on IDEAS
    10. Fisher, Franklin M, 1970. "Tests of Equality Between Sets of Coefficients in Two Linear Regressions: An Expository Note," Econometrica, Econometric Society, vol. 38(2), pages 361-366, March.
    11. Arthur J. Robson, 1976. "Public Education, Income Distribution, and Voting," University of Western Ontario, Departmental Research Report Series 7615, University of Western Ontario, Department of Economics.
    12. Emil-Maria Claassen, 1974. "The optimizing approach to the demand for international reserves," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 110(3), pages 353-398, September.
    13. repec:bla:scandj:v:78:y:1976:i:2:p:255-75 is not listed on IDEAS
    14. Kelly, Michael G, 1970. "The Demand for International Reserves," American Economic Review, American Economic Association, vol. 60(4), pages 655-667, September.
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    Cited by:

    1. Jeffrey Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 384-416, July.
    2. Mr. Hamid Faruqee, 2004. "Measuring the Trade Effects of EMU," IMF Working Papers 2004/154, International Monetary Fund.

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