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The article presents the estimation of the cost of adjustment to external disequilibria. The stability of an economy may be upset by disequilibria in the commercial and financial relationships between the domestic economy and the economies of other nations. These disequilibria will either be stochastic or structural in nature. The cost of adjustment to stochastic disequilibria may be defined as the change in national income required to alter temporarily the balance of payments by one monetary unit, there by offsetting the disequilibrium by one monetary unit. That is, the cost of adjustment A is a ratio A=dV/dQ. On an a priori basis, the cost of adjustment f under expenditure changing policies can be quantified as the reciprocal of the marginal propensity to import m. In the context of the above discussion the A Model of Reverse Demand. In general form, the demand for reserves can be written as E(R)* =R[Q,H,A,W] RQ0,RH<0,RA>0,RW>0.

The article discusses various issues related to the demand for international reserves. There is not sufficient evidence to reject the "import-target ratio hypothesis." The import-target reserve ratio hypothesis yields results as good as the "disturbance hypothesis" in terms of the economists Peter B. Kenen-Elinor B.Yudin criterion, even with the crude method of determining the target ratios employed above. The level of international reserves a country holds is not only a result of its experience with balances of payments but also a result of the economic policies it follows. The "disturbance hypothesis" excludes the possibility of policy variations among countries and implicitly assumes that all countries will react identically to variations in their balance of payments. Consequently the "disturbance hypothesis," at best, is a short-run explanation of the demand for international reserves. The target ratio hypothesis, on the other hand, is capable of accommodating basic policy changes in a particular country, and in the more general logarithmic form of equation, certain structural and institutional changes in the international monetary system affecting all countries reserve holding behavior.

The article presents information on international reserves. If economists could measure the need for reserves, they might be able to agree on the right way to reform the international monetary system. Most of the economists who propose drastic reform do so because they anticipate a shortage of reserves. Those who advocate more gradual change believe that reserves are adequate now and for the next several years some even believe that reserves are excessive. It is even difficult to measure the stock of reserves, as the several reserve assets and reserve credits now in use are not perfect substitutes for one another; equal amounts of gold, currency and credit may make unequal contributions to a nation's external liquidity. Governments have many reasons for holding reserve assets, including the requirements of domestic monetary legislation or long-standing custom. But the paramount reason for holding reserves is the commitment to maintain stable exchange rates in the lace of payments disturbances. Trade and private service flows, government transactions and capital movements are subject to several disturbances like secular, cyclical, seasonal and random.