Search

The arrangements for international trade and payments embodied in the Bretton Woods agreements reflected two aspects of the experience of the interwar period. On the one hand, many economists felt that a domestic policy aimed at full employment, could at times, be inconsistent with fixed exchange rates and a liberal trade policy. On the other hand, the attempts of individual countries to free domestic policy from the constraints of the balance of payments, by unilateral devaluations, or by protectionist devices, led to retaliation, competitive devaluations, and competitive increases in trade restrictions, which disrupted international trade. [ABSTRACT FROM AUTHOR]

The article discusses how anti-recessionary policies involving low interest rates might put pressure on the foreign reserve position of the United States by bringing about a conversion of foreign-held dollar balances in gold. The article also examines the influence of monetary and fiscal measures on current account. The article's general conclusion is that those movements in foreign holdings between gold and dollar assets throughout the years, which could be attributed to interest-rate changes, account for only a small fraction of total foreign dollar holdings.

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.

International reserves held by the monetary authorities of countries are not used to finance international transactions but to allow the maintenance of fixed exchange rates through intervention by the monetary authorities in the foreign-exchange market. That is to say, international reserves are held by the monetary authorities for precautionary motives namely, to be able to finance temporary balance-of-payments deficits. This forestalls the need for immediate adjustment to the imbalances and allows the country to pursue more independent domestic policies in the face of external disturbances. It is clear that the quantity of international reserves required for this purpose is closely related to the magnitude of the imbalances in the balance of payments. The International Monetary Fund and several economists cling to the traditional reserves/imports ratio as a measure of the adequacy of international reserves, but it is generally recognized that this ratio is useful only insofar as the volume of trade and the size of the imbalances are correlated.

Under the gold-exchange standard, national currencies have supplemented gold as an international means of payment. Investigation of these policies is essential in assessing the adequacy of international reserves and the urgency of reducing the U.S. balance of payments deficit. This article extends and tests Kenen's model on reserve policies of central banks and show its implications for the U.S. balance of payments policy. Kenen built his model around a global function for central banks' reserve-asset preferences. If the foreign assets of nonofficical holders become very large, there is always a danger that the central banks will be flooded with dollars once these assets are liquidated. Such large-scale liquidations are most likely to occur when reserve currencies are weak and when it is most awkward to convert dollars into gold. The U.S. short-term investment position (official and private) is a very important determinant of reserve policies, while the return on dollar holdings plays only a minor role. The U.S. balance of payments measures will be more successful in reducing the gold drain, if they are aimed at countries that hold relatively few dollars as international reserves.

The article presents a discussion on international liquidity. According to professor Peter B. Kenen, the stock of reserve assets is adequate, for now and for the foreseeable future. In Continental Europe, there is now probably a better equilibrium in the basic balance of payments between industrial countries than in recent years. A relative calm has descended on the foreign exchanges, and the short-term need for reserves has in a sense been reduced. Nevertheless, there are a number of considerations that argue against a too complacent view. The primary indicator of the desirability of larger or smaller international reserves is the deflation/inflation situation of the world, and particularly of those countries whose financial policies are likely to be influenced by the state of their reserves. The tendency to a decline in the propensity of countries to hold their reserves in the form of foreign exchange has occurred despite the possibly abnormally high level of the Canadian proportion of foreign exchange, the new willingness of the U.S. to hold foreign exchange reserves, the rather artificial increase in exchange reserves associated with bilateral swap transactions and the general restoration of confidence in the international exchanges.

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.

Examines the effect of reserve price scheme for wool on the balance of payments and gross national product. Influence on national income; Analysis on the elasticity of demand for wool and reserve price; Determination on the marginal rate of taxation on wool growers income.

This article examines the accuracy of the equation which expressed the optimal international level of reserves in terms of the size of imbalance, the social productivity of capital and the propensity to import. The article presented an equation to represent the probability of obtaining a deficit in any given period if the balance payments is considered as transcribing in a simple random walk path. The author of this article presented an equation for the total cost function and criticizes the previous optimal international reserves equation.