Advertisement

Pure theory and some specific issues

  • J. A. H. de Beaufort Wijnholds
Part of the Publication of the Netherlands Institute of Bankers and Stock Brokers book series (PIBS, volume 31)

Abstract

After the more practically oriented approaches reviewed in chapter 5, this chapter discusses the pure theory of the need for reserves. The motives for hording reserves are treated in section i, followed by the welfare economic approach (section ii), and theories concentrating on the utility and cost of reserves (section iii) which can be considered as elaborations of the welfare economic approach. Tentative attempts at the construction of a world macro-economic model, from which to determine needed increases in global reserves, are the subject of section iv. In the remainder of the chapter (sections ν to vii) some specific issues are dealt with; after a brief review of a revival of the monetary approach, the reserve need of reserve currency countries and the relation of international capital flows to reserve need are looked at.

Keywords

Central Bank Money Supply Monetary Authority International Reserve International Liquidity 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. 1.
    Cf. p. 22 above.Google Scholar
  2. 2.
    Cf. Bent Hansen, International Liquidity, Central Bank of Egypt Lectures, Cairo, 1962 (also published as Occasional Paper 1 of the National Institute of Economic Research, Stockholm, 1964). Others have at times applied the same distinction; for a recent example cf. Emil-Maria Claassen, “The Optimizing Approach to the Demand for International Reserves”, Weltwirtschaftliches Archiv, no. 3, 1974. It should be noted, however, that Claassen does not consider the transactions motive to be relevant for international reserves.Google Scholar
  3. 3.
    Cf. note 3 on p. 64 above.Google Scholar
  4. 2.
    Cf. H. Robert Heller, “Optimal International Reserves”, Economic Journal, June 1966, p. 300, and H. Robert Heller, “The Transactions Demand for International Means of Payments”, Journal of Political Economy, January/February 1968, p. 141.Google Scholar
  5. 5.
    Heller (1968), p. 142.Google Scholar
  6. 1.
    Cf. Richard N. Cooper, “International Liquidity and Balance of Payments Adjustment”, in International Reserves: Needs and Availability, especially pp. 125–128.Google Scholar
  7. 2.
    Cf., Milton Gilbert, The Gold-Dollar System: Conditions of Equilibrium and the Price of Gold, Essays in International Finance No. 70, Princeton, October 1968. With regard to the war chest motive Gilbert notes that “every major country gives it some weight in its reserve policy” (P. 6).Google Scholar
  8. 1.
    Cf., for instance, remarks by Miroslav A. Kriz, in “Discussion on the Future of Gold”, American Economic Review, May 1969, pp. 354–355. Hirsch has contended, however, that the financial history of the Second World War provides examples of uncertainty as to the usability of gold and that a preference toward foreign exchange probably occurred at the time (cf., American Economic Review, May 1969, p. 353).Google Scholar
  9. 2.
    J. Marcus Fleming, “International Liquidity: Ends and Means”, IMF Staff Papers, December 1961, p. 440.Google Scholar
  10. 3.
    Ibid., p. 441.Google Scholar
  11. 4.
    Cf. J. Marcus Fleming, Toward Assessing the Need for International Reserves, Essays in International Finance No. 58, Princeton, February 1967.Google Scholar
  12. 5.
    Fleming (1967), p. 1.Google Scholar
  13. 6.
    The latter factor denotes an increase in external imbalances and provides, according to Fleming, a prima facie evidence of a distortion of international capital flows; cf. Fleming, p. 7.Google Scholar
  14. 1.
    Subject to certain qualifications, however; cf. Fleming, pp. 13, 14.Google Scholar
  15. 2a.
    Ibid., p. 12. Several other authors have also concentrated on the growth aspect of the need for reserves and sometimes even de-emphasized the importance of the level of reserves. Cf., Milton Gilbert, Problems of the International Monetary System, Essays in International Finance No. 53, Princeton, April 1966, p. 13 et seq.;Google Scholar
  16. 2b.
    Milton Gilbert, The Gold-Dollar System: Conditions of Equilibrium and the Price of Gold, Essays in International Finance No. 70, Princeton, October 1968, pp. 20,Google Scholar
  17. 2c.
    Milton Gilbert, The Gold-Dollar System: Conditions of Equilibrium and the Price of Gold, Essays in International Finance No. 70, Princeton, October 1968, 21;Google Scholar
  18. 2d.
    Robert Triffin, Our International Monetary System: Yesterday, Today and Tomorrow, New York, 1968, p. 92;Google Scholar
  19. 2e.
    Tibor Scitovsky, Money and the Balance of Payments, London, 1969, p. 164. As was noted on p. 75 above, Machlup believes that it makes sense only to talk about the need for reserve growth.Google Scholar
  20. 3a.
    For these aspects, cf. also the approach suggested by Salant (pp. 87–89 above).Google Scholar
  21. Cf. Jürg Niehans, “The Need for Reserves of a Single Country”, in International Reserves: Needs and Availability, pp. 68,Google Scholar
  22. 3b.
    For these aspects, cf. also the approach suggested by Salant (pp. 87–89 above).Google Scholar
  23. Cf. Jürg Niehans, “The Need for Reserves of a Single Country”, in International Reserves: Needs and Availability, 89.Google Scholar
  24. 1.
    Cf. Fleming, p. 18.Google Scholar
  25. 2.
    Cf. comments by Fleming on papers by Professors Kemp and Sohmen, in International Reserves: Needs and Availability, p. 33.Google Scholar
  26. 3.
    Cf. IMF, Annual Report, 1973, p. 43.Google Scholar
  27. 4.
    Cf. Murray C. Kemp, “World Reserve Supplementation: Long-Run Needs for Short-Run Purposes”, in International Reserves: Needs and Availability, p. 9.Google Scholar
  28. 1.
    Cf. International Reserves: Needs and Availability, p. 43.Google Scholar
  29. 2.
    H. Robert Heller, “Optimal International Reserves”, Economie Journal, June 1966. A concise treatment is given in Heller’s textbook, International Monetary Economics, Englewood Cliffs, 1974.Google Scholar
  30. 1.
    Expenditure changing policies involve changes in the level of expenditure and income by means of demand management policies, whereas expenditure switching policies involve changes in relative prices between domestic and foreign goods. The latter include changes in the domestic price level, exchange rate adjustments and the use of trade and payments restrictions. The terms expenditure changing and expenditure switching policies were introduced by Professor Harry Johnson; cf. H.G. Johnson, International Trade and Growth: Studies in Pure Theory, Cambridge ( Mass.)/London, 1958, p. 162.Google Scholar
  31. 2.
    Cf. Niehans in International Reserves: Needs and Availability, p. 81, and Williamson, p. 691.Google Scholar
  32. 3.
    Cf. Clower and Lipsey, p. 591.Google Scholar
  33. 4.
    Cf. Williamson, pp. 692, 693.Google Scholar
  34. 1.
    Cf. Niehans in International Reserves: Needs and Availability, p. 81, and Williamson, p. 691.Google Scholar
  35. 2.
    Peter B. Clark, “Optimum International Reserves and the Speed of Adjustment”, Journal of Political Economy, March/April 1970. Clark originally presented his approach in his doctoral dissertation in 1967.Google Scholar
  36. 3.
    Michael G. Kelly, “The Demand for International Reserves”, American Economic Review, September 1970. This article is based on Kelly’s doctoral dissertation of 1968.Google Scholar
  37. 4.
    F. Steb Hippie, The Disturbances Approach to the Demand for International Reserves, Studies in International Finance No. 35, Princeton, 1974.Google Scholar
  38. 1.
    See the Appendix.Google Scholar
  39. 2.
    Emil-Maria Claassen, “The Optimizing Approach to the Demand for International Reserves”, Weltwirtschaftliches Archiv, No. 3, 1974.Google Scholar
  40. 3.
    Quantitative studies on the demand for reserves, including those using the optimizing approach, are briefly summarized in the Appendix.Google Scholar
  41. 4.
    The distinction between these concepts is explained in the Introduction, and in section i of chapter 9.Google Scholar
  42. 5.
    Niehans recognizes that there are situations where downward adjustment has beneficial effects: see the discussion of his treatment of the transitional costs of reserves on p. 108 below. Brief mention of this matter is also made in Jürgen Rohwedder and Ulrich Schröder, “Der Bedarf an Währungsreserven” (The Need for Monetary Reserves), Weltwirtschaftliches Archiv, No. 2, 1970, p. 440, and in Willy Sellekaerts and Brigitte Sellekaerts, “Balance of Payments, the Adjustment Cost and the Optimum Level of International Reserves”, Weltwirtschaftliches Archiv, No. 1, 1973, p. 5, n. 2.Google Scholar
  43. 1.
    Cf. John H. Makin, Capital Flows and Exchange Rate Flexibility in the Post-Bretton Woods Era, Essays in International Finance No. 103, Princeton, February 1974, pp. 18, 19.Google Scholar
  44. 2.
    This is caused by the particular form of the equation which Clark derives for the relationship between the variability in income and the speed of adjustment; cf. Clark, p. 365.Google Scholar
  45. 3.
    See the Appendix.Google Scholar
  46. 4.
    Jacob A. Frenkel, “Openness and the Demand for International Reserves”, in: Robert Z. Aliber (ed.), National Monetary Policies and the International Financial System, Chicago, 1974.Google Scholar
  47. 1.
    Ronald Britto and H. Robert Heller, “International Adjustment and Optimal Reserves”, International Economic Review, February 1973.Google Scholar
  48. 1.
    Willy Sellekaerts and Brigitte Sellekaerts, “Balance of Payments Deficits, the Adjustment Cost and the Optimum Level of International Reserves”, Weltwirtschaftliches Archiv, No. 1, 1973.Google Scholar
  49. 2.
    Cf. Mordechai E. Kreinin and H. Robert Heller, “Adjustment Costs, Optimal Currency Areas, and International Reserves” in Willy Sellekaerts (ed.), International Trade and Finance: Essays in Honour of Jan Tinbergen, London, 1974.Google Scholar
  50. 1.
    “The Need for Reserves of a Single Country”, in International Reserves: Needs and Availability. It is unfortunate that Niehans equates the concept of the utility of reserves with the need for or the adequacy of reserves. Utility of reserves is only one aspect of the need for reserves (in the sense of optimal reserves), whereas the need for reserves is only half the picture of the adequacy of reserves.Google Scholar
  51. 3.
    Niehans suggests that at a certain point along the marginal utility curve a “minimum of subsistence” level may be marked off, which he designates the “need” for reserves. It seems preferable not to use the term “need for reserves” in this sense (see note 2 above).Google Scholar
  52. 1.
    Cf. Niehans, p. 52. Kuczynski has also noted that Niehans’ subject matter “is optimal rather than desired reserves”. He points out, however, that this distinction is not so important in the case of individual countries since it may be assumed that the national authorities’ desires “are for the feasible best”. On a global level, however, nationally desired reserves may well conflict with the world-wide optimum, for instance because of the application of trade and payments restrictions; cf. Comments by Michael Kuczynski on Niehans’ paper in International Reserves: Needs and Availability, p. 86.Google Scholar
  53. 1.
    Cf. Comments by Kuczynski in International Reserves: Needs and Availability, p. 88.Google Scholar
  54. 1.
    Cf., Fleming (1967), p. 16.Google Scholar
  55. 2.
    These papers were published in the volume International Reserves: Needs and Availability, to which frequent reference has been made in the above.Google Scholar
  56. 3.
    Rudolf R. Rhomberg, “Estimation of Effects of Changes in International Reserves”, in International Reserves: Needs and Availability.Google Scholar
  57. 4.
    See p. 87 above.Google Scholar
  58. 5.
    Extension of the model to take into account such factors as economic growth, differences in timing of policy reactions, differences in initial payments imbalances, differences in cyclical position, different intensity of the use of policies, and the existence of additional targets, would not alter the ultimate results significantly, according to Rhomberg (cf. pp. 169–172).Google Scholar
  59. 1.
    Rhomberg does not mention the fact that in the case of a parity change of a reserve currency, which is held relatively widely as part of the official reserves of countries, the effect will tend to be the opposite (e.g. the devaluation of the dollar in 1971 and 1973 reduced the value of dollar reserves in terms of SDRs, whereas gold holdings retained their value in terms of SDRs).Google Scholar
  60. 1.
    Cf. Rhomberg, p. 189.Google Scholar
  61. 2.
    A major effort toward constructing a world econometric model by linking existing national models through their trade equation is being undertaken through the so-called project LINK, which was started in 1968. Comprehensive information on this project is contained in: R.J. Ball (ed.), The International Linkage of National Economic Models, Amsterdam, 1973.Google Scholar
  62. 1.
    Cf. pp. 95–97 above.Google Scholar
  63. 2.
    Cf. pp. 108–110 above.Google Scholar
  64. 3.
    Cf. J. Marcus Fleming, “The SDR: Some Problems and Possibilities”, IMF Staff Papers, March 1971, p. 32.Google Scholar
  65. 4.
    The monetary approach, as developed in the fifties, is discussed in sections iii and iv of chapter 4.Google Scholar
  66. 5.
    Cf. section ii of chapter 5.Google Scholar
  67. 6.
    Cf. Robert Triffin, Our International Monetary System: Yesterday, Today and Tomorrow, New York, 1968, p. 89.Google Scholar
  68. 1.
    Cf. Comments by Triffin on the paper by Niehans in International Reserves: Needs and Availability, p. 89.Google Scholar
  69. 2.
    In his discussion of the monetary approach in reserve need theories, Niehans mentions with appreciation the contributions of Scitovsky and Johnson. Holtrop’s important contribution is not mentioned, obviously because Niehans is not familiar with it. This can be concluded from his criticism of Scitovsky’s notion that in principle all cash balances can be activated (used to indulge in excess spending). Niehans (p. 62), without noting that Holtrop avoided the problem, points out that: “For most countries it would seem extravagant to require reserves to be sufficient for the case that all individuals want to get rid of all their present cash balances.” As has been shown in section iv of chapter 4, this problem is adequately dealt with in Holtrop’s analysis through the use of his concept of the uncommitted liquid assets.Google Scholar
  70. 3.
    Walter S. Salant, “Practical Techniques for Assessing the Need for World Reserves”, in International Reserves: Needs and Availability, p. 292.Google Scholar
  71. 4.
    Cf. Comments by Rhomberg on Salant’s paper in International Reserves: Needs and Availability, p. 309.Google Scholar
  72. 5.
    The Need for Reserves: Calculation for the Period 1973–1977, May 1972.Google Scholar
  73. 1.
    Cf. sections iii and iv of chapter 4.Google Scholar
  74. 2.
    Cf. Robert Triffin, Gold and the Dollar Crisis, New Haven, 1960.Google Scholar
  75. 3.
    Cf. Peter B. Kenen, “International Liquidity and the Balance of Payments of a Reserve-Currency Country”, (Quarterly Journal of Economics, November 1960.Google Scholar
  76. 1.
    Edward M. Bernstein, “The Adequacy of United States Gold Reserves”, American Economic Review, May 1961, p. 441.Google Scholar
  77. 2.
    Cf. J. Marcus Fleming, Toward Assessing the Need for International Reserves, Essays in International Finance No. 58, February 1967, p. 6.Google Scholar
  78. 3.
    Cf. Walter S. Salant, “Practical Techniques for Assessing the Need for World Reserves”, in International Reserves: Need and Availability, (1970), pp. 299–301.Google Scholar
  79. 1.
    W.D. McClam, “Present Interrelationships between Money Markets and Foreign Exchange Markets”, Economie, July 1970, p. 522.Google Scholar
  80. 2.
    Cf. E. Wayne Clendenning, The Euro-Dollar Market, Oxford, 1970, p. 160.Google Scholar
  81. 3.
    For an early exposition of this view cf. Paolo Baffi, “Western European Inflation and the Reserve Currencies”, Banca Nazionale del Lavoro Quarterly Review, March 1968.Google Scholar
  82. 4.
    Cf. Clendenning, pp. 160–161, and Klaus Friedrich, “The Euro-Dollar System and International Liquidity”, Journal of Money, Credit and Banking, August 1970, p. 339.Google Scholar
  83. 5.
    Cf. Clendenning, p. 161.Google Scholar
  84. 6.
    Cf. Victor Argy, Comments on a paper by Ahtiala in International Reserves: Needs and Availability, p. 258.Google Scholar
  85. 7.
    Cf. Otmar Emminger, “The Euromarket: A Source of Stability or Instability?“, in Herbert V. Prochnow (ed.), The Euro-Dollar, Chicago, 1970, pp. 115–116.Google Scholar
  86. 1.
    Cf. Fred Hirsch, Control of International Liquidity and the Euro-Dollar Market, paper presented to the Bournemouth Conference of the Money Study Group, February 1972.Google Scholar
  87. 2a.
    Cf. IMF, Annual Report, 1972, p. 33,Google Scholar
  88. 2b.
    Cf. IMF, and Annual Report, 1973, p. 43.Google Scholar
  89. 3a.
    Cf. IMF, Annual Report, 1974, pp. 26,Google Scholar
  90. 3b.
    Cf. IMF, Annual Report, 1974, 27.Google Scholar
  91. 1.
    In Holtrop’s terminology: “committed”; cf. p. 50 above.Google Scholar
  92. 2.
    Cf. Report of the Nederlandsche Bank for the year 1972, p. 19.Google Scholar
  93. 3.
    Cf. International Reserves: Needs and Availability, p. 258.Google Scholar

Copyright information

© Springer Science+Business Media New York 1977

Authors and Affiliations

  • J. A. H. de Beaufort Wijnholds

There are no affiliations available

Personalised recommendations