Austria's Demand for International Reserves and Monetary Disequilibrium: The Case of a Small Open Economy with a Fixed Exchange Rate Regime

Abstract

Using a vector error correction approach, I estimate Austria's demand for international reserves over the period 1985:1–1997:4 and test for short‐run effects of the disequilibrium on the national monetary market. I find that Austria's long‐run reserve demand can be described as a stable function of imports, uncertainty and the opportunity cost of holding reserves with strong economies of scale. The speed of adjustment takes a value of 38 per cent. The results confirm that an excess of money demand (supply) induces an inflow (outflow) of international reserves as postulated by the monetary approach to the balance of payments.

Foreign Exchange Reserves and the Macro-economy in the GCC Countries

“…Ben-Bassat Gottlieb (1992 found a negative relationship between the demand for foreign exchange reserves and the opportunity cost of holding these reserves. This is consistent with the results of a study carried out by Badinger (2004) for Austria. Badinger noted that the opportunity cost of holding reserves is a crucial determinant of the demand for reserves.…”

“…The literature on the demand for foreign exchange reserves includes numerous research studies investigating especially the effect of the opportunity cost on reserve holdings: Ben-Bassat Gottlieb, 1992;Badinger, 2004;Prabheesh et al, 2007;Bastourre et al, 2009. Ben-Bassat Gottlieb (1992 found a negative relationship between the demand for foreign exchange reserves and the opportunity cost of holding these reserves.…”

Demand for and Adequacy of International Reserves in Sri Lanka

“…The contributions of Engle and Granger (1987) and Johansen (1988) have provided an opportunity to derive statistically appropriate estimates based on the analyses of cointegrating relationships between non-stationary variables, (i.e., if the variables are found to be non-stationary, then the long-run relationship can be appropriately examined through cointegration tests). To that end, (Badinger, 2004) and only 12% of the deviation from equilibrium is eliminated within one quarter, taking around 2 years to reach long-term equilibrium. Hence, the model indicates a slower response from the authorities when the reserves deviate from the desired level.…”

“…For example, in a survey article, Bahmani-Oskooee and Brown (2002) argue that imports report mixed signs across empirical literature of reserve demand. In particular, although a positive coefficient is generally expected, negative coefficients have been observed for the variables that capture the impact of imports, for example in Huang (1995), Badinger (2004), Sehgal and Shrama (2008) Gosselin and Parent (2005) and Prabheesh et al (2007), among others, we adopt the error correction model and cointegration analysis in this study. We start with the unit root tests and then proceed to estimate Eq.…”

Determinants and sustainability of international reserves accumulation in Nigeria

“…IMF (2003) utilised a large panel of emerging market economies during the period 1980-1986 and found that real GDP per capita, population level, ratio of import to GDP, and exchange rate volatility were statistically signifi cant determinants of real reserves whilst measures of capital account vulnerability and opportunity cost were insignifi cant in explaining reserve holding. Badinger (2004) attempted to estimate Austria's demand for international reserves over the period 1985:1-1997:4 and test for short-run effects of the disequilibrium on the national monetary market. He found that Austria's long-run reserve demand can be described as a stable function of imports, uncertainty and the opportunity cost of holding reserves with strong economies of scale.…”