Slide 1Nature of International ReservesDemand for International ReservesDemand for International ReservesDemand for International ReservesSlide 6Demand for International ReservesDemand for International ReservesDemand for International ReservesSupply of International ReservesForeign CurrenciesForeign CurrenciesSlide 13Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?Should SDRs replace the dollar as the world’s reserve currency?GoldGoldGoldGoldGoldGoldGoldSpecial Drawing RightsSpecial Drawing RightsSpecial Drawing RightsFacilities for Borrowing ReservesFacilities for Borrowing ReservesFacilities for Borrowing ReservesInternational Lending RiskInternational Lending RiskThe Problem of International DebtThe Problem of International DebtThe Problem of International DebtThe Problem of International DebtReducing Bank Exposure to Developing-Nation DebtReducing Bank Exposure to Developing-Nation DebtReducing Bank Exposure to Developing-Nation DebtDebt Reduction and Debt ForgivenessDebt Reduction and Debt ForgivenessThe Eurodollar MarketThe Eurodollar MarketInternational Banking:Reserves, Debt, and Risk© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐1PowerPoint slides prepared by:Andreea ChiritescuEastern Illinois UniversityNature of International Reserves•International reserves•Enable nations to finance disequilibrium in their balance-of-payments positions•Deficit: monetary receipts fall short of monetary payments•Settled with international reserves•Enable nations to sustain temporary balance-of-payments deficits•Until acceptable adjustment measures can operate to correct the disequilibrium© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐2Demand for International Reserves•Demand for international reserves •Depends on•Monetary value of international transactions•Disequilibrium that can arise in balance-of-payments positions•Contingent on •Speed and strength of the balance-of-payments adjustment mechanism•Overall institutional framework of the world economy© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐3Demand for International Reserves•Demand for international reserves •Exchange-rate flexibility•Automatic adjustment mechanisms that respond to payments disequilibrium•Economic policies used to bring about payments equilibrium•International coordination of economic policies© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐4Demand for International Reserves•Changes in the degree of exchange-rate flexibility •Inversely related to changes in the quantity of international reserves demanded•More rapid and flexible exchange-rate adjustments requires smaller reserves© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐5When exchange rates are fixed (pegged) by monetary authorities, international reserves are necessary for the financing of payment imbalances and the stabilization of exchange rates. With floating exchange rates, payment imbalances tend to be corrected by market-induced fluctuations in the exchange rate; the need for exchange-rate stabilization and international reserves then disappears.© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐6The demand for international reserves and exchange-rate flexibilityFIGURE 17.1Demand for International Reserves•Automatic adjustment mechanisms •Prices, interest rates, incomes, and monetary flows •The more efficient each of these adjustment mechanisms is•The smaller and more short-lived market imbalances will be and •The fewer reserves will be needed© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐7Demand for International Reserves•Choice & effectiveness of government policies•Adopted to correct payments imbalances•The greater a nation’s propensity to apply commercial policies to key sectors•Tariffs, quotas, and subsidies•The less will be its need for international reserves•Assuming that the policies are effective in reducing payments disequilibrium© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use‐8Demand for International Reserves•International coordination of economic policies•Goal of economic cooperation: •Reduce the frequency and extent of payment imbalances•Reduce the demand for international reserves•Quantity demanded of international reserves•Positively related to the level of world prices and income© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in