On the Effect of Opportunity Cost on International Reserve Holdings

Ben-Bassat, Avraham; Gottlieb, Daniel

doi:10.2307/2109666

Cited by 48 publications

(22 citation statements)

References 11 publications

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“…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.…”

Section: The Intervention Model the Asset Choice Model And The Vulnmentioning

confidence: 99%

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

Azar

Aboukhodor

2017

AFR

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This research looks into the accumulation of foreign exchange reserves and the development of the macro-economy in the Gulf and Cooperation Council countries (GCC countries), namely, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Using yearly data covering the period from 1996 through 2015, the empirical results show positive and significant relationships between foreign exchange reserves accumulation on one hand, and oil prices, GDP, the ratio of current account to GDP, and the ratio of broad money to GDP on the other hand. Moreover, the results point to negative and significant relationships between foreign exchange reserves accumulation on one hand, and real effective exchange rate, the ratio of debt to GDP, and call money rates on the other hand. However, the results show that the stockpile of foreign exchange reserves in the GCC countries is not sensitive to nominal effective exchange rates, neither to the ratio of imports to GDP, and nor to interest rates on the US Dollar. Furthermore, the study shows a robust and positive link between foreign exchange reserves and oil prices on the one hand and economic growth in these countries on the other hand.

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Section: The Intervention Model the Asset Choice Model And The Vulnmentioning

confidence: 99%

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

Azar

Aboukhodor

2017

AFR

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“…The opportunity cost of holding international reserves plays an important role in all theoretical models of the demand for reserves, yet most empirical studies have been unable to find a significant opportunity cost effect. Ben‐Bassat and Gottlieb (1992 b ) show that when the opportunity cost is measured properly, it can be a significant determinant of reserve demand 8 . Ideally, the opportunity cost should be measured as the difference between the highest possible marginal productivity forgone from an alternative investment in fixed assets and the yield on international reserves.…”

Section: Empirical Evidencementioning

confidence: 99%

“…8 8 See Hipple (1979), Bahmani‐Oskooee (1985), Edwards (1985) and Ben‐Bassat and Gottlieb (1992 b ) for further discussion on measuring the opportunity cost variable empirically. Ben‐Bassat and Gottlieb (1992 b ) computed a more appropriate measure of the opportunity cost of holding reserves for Israel during the 1968–88 period. …”

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confidence: 99%

International Reserve Holdings with Sovereign Risk and Costly Tax Collection

Aizenman

Marion

2004

The Economic Journal

175

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We derive a precautionary demand for international reserves in the presence of sovereign risk and show that political-economy considerations modify the optimal level of reserve holdings. A greater chance of opportunistic behaviour by future policy makers and political corruption reduce the demand for international reserves and increase external borrowing. We provide evidence to support these findings. Consequently, the debt-to-reserves ratio may be less useful as a vulnerability indicator. A version of the Lucas Critique suggests that if a high debt-toreserves ratio is a symptom of opportunistic behaviour, a policy recommendation to increase international reserve holdings may be welfare-reducing.

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“…Heller and Khan (1978) further investigates the question raised by Frenkel (1978), for which they estimate ARIMA models for reserves of the six country groupings with quarterly data over the period 1964-76. Following the model specifi cation of Frenkel and Jovanovic (1981), Ben-Bassat and Gottlieb (1992) tried to estimate the opportunity cost with respect to demand for reserves but fi nd that the OLS estimates were ineffi cient with biased t-values. They thus opted for autoregressive process, moving average and a synchronisation of both techniques and found that the fi rst order moving average produced the best result as it signifi cantly improved parameter estimates.…”

Section: Review Of Methodological Issuesmentioning

confidence: 99%

“…If we accept the use of time discounting as a method of comparing the economic values of consumption in different time periods, then sustainability appears to mean nothing more than effi cient resource allocation -a concept already well established in economics. Ben-Bassat and Gottlieb (1992) in an empirical study of the effect of opportunity cost on international reserve holding on Israel during the period 1968 -1988 found that if measured correctly, opportunity cost plays a pivot role in determining reserves. Dow (2001) estimated the demand for excess reserves in the United States and fi nds that excess reserves are negatively related to the Federal funds rate and positively related to transactions deposits.…”

Section: Review Of Empirical Issuesmentioning

confidence: 99%