The Transactions Demand for International Means of Payments.

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.