Chapter

The Accumulation of International Reserves as a Defense Strategy

Fernando J. Cardim de Carvalho

in Time for a Visible Hand

Published in print January 2010 | ISBN: 9780199578801
Published online February 2010 | e-ISBN: 9780191723285 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199578801.003.0015

Series: Initiative for Policy Dialogue

The Accumulation of International Reserves as a Defense Strategy

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The chapter by Carvalho explores the accumulation of international reserves as a defensive strategy, as well as the reasons and limitations of their “self‐insurance” function. Conceptually, countries demand reserves of foreign currencies for a similar set of reasons to those which explain why individuals demand liquidity. However, while individuals hold liquid assets primarily to effect transactions, countries do it mostly for precautionary reasons. Again, as in the case of individuals, the stronger the demand for money, the harder it is to obtain liquidity in public sources and money markets. The chapter notes that international liquidity provision remains as important now as it was in the recent past. Carvalho argues that the best alternative would clearly be an international monetary system where a new international currency could be created according to global liquidity needs, as well as for emergency liquidity facilities to protect countries from adverse temporary external shocks.

Keywords: international liquidity; reserve accumulation; self‐insurance; new international currency

Chapter.  8184 words. 

Subjects: Macroeconomics and Monetary Economics

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