DEMAND FOR INTERNATIONAL RESERVES IN LESS DEVELOPED COUNTRIES: A DISTRIBUTED LAG SPECIFICATION.

The article focuses on the demand for international reserves in less developed countries. An attempt has is made in the paper to ascertain determinants of the demand for international reserves by the monetary authorities of the less developed countries. An important aim of the paper is to improve on specifications of the demand-for-reserve functions that exist in the literature. The model presented improves on existing ones in many respects, including concepts of actual and optimum reserves are differentiated and the relationship between them rigorously specified; determinants of the optimum level of international reserves are obtained by maximizing an intertemporal, stochastic macroeconomic model; an expected export earnings variable is estimated and used as an explanatory variable; and distributed lag adjustment is introduced. In one section a modified partial adjustment model is specified. The equation to be estimated has a second-order lag scheme. In the third section, the estimation methods and data sources are discussed.