Essays on demand for international reserves
Cabrera, Glenn Ymballa
Doctor of Philosophy thesis
This dissertation consists of four chapters. In the first chapter, a review is made of the research on international reserve demand in the last decade. The next three chapters offer alternative models of reserve demand. One motive for why foreign currencies are held by national central banks (NCBs) is to intervene in the foreign exchange market. A primary goal of the last three chapters is to incorporate such an intervention motive in modeling demand for foreign exchange reserves by the public sector. Another goal--more fully studied in the last chapter--is to assess the effects of exchange controls on demand for reserves. Disequilibrium regime-switching econometrics is the modeling framework employed. This methodology allows for the possibility that a different demand regime may be in effect in periods when the NCB is a net buyer of foreign currencies as compared to periods when it is a net seller. To deal with the effects of constant changes in the exchange control environment--which could alter demand behavior--a robust method is used which weighs down observations from periods where the standard model performs poorly. Some evidence is found that market intervention changes the response of demand for foreign reserves with respect to trade and the opportunity cost. This effect is not uniform across countries however. National demands for foreign reserves are also found to vary. Furthermore, the period where the model performs poorly are not characterized chiefly by heavy exchange controls but by political/economic shocks and uncertainty. Shocks and uncertainty alter demand for foreign currency reserves while exchange controls appear to be ineffective.
Economics; Economics, Commerce-Business; Finance