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Foreign Exchange Reserves Policy Status And Issues
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Category : Business » Forex Trading
. the very low level of forex reserves and the manner in which . The shift has occurred from a single indicator to a menu or multiple. indicators approach. .
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Content Summary :
It is possible to identify four sets of indicators to assess adequacy of reserves, and each of them do provide an insight into adequacy though none of them may by itself fully explain adequacy. First, the money based indicators including reserve to broad money or reserves to base money which provide a measure of potential for resident based capital flight from currency. An unstable demand for money or the presence of a weak banking system may indicate greater probability of such capital flights. Money based indicators, however, suffer from several drawbacks. In countries, where money demand is stable and confidence in domestic currency high, domestic money demand tends to be larger and reserves over money ratios, relatively small. Therefore, while a sizable money stock in relation to reserves, prima facie, suggests a large potential for capital flight out of money, it is not necessarily a good predictor of actual capital flight. Money based indicators also do not capture comprehensively the potential for domestic capital flight. Moreover, empirical studies find a weak relationship between money based indicator and occurrence and depth of international crises.
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