The Optimal Level and Demand for International Reserves in Iran: An Optimization Formula and Monetary Disequilibrium

Document Type : Research Paper

Authors

1 Faculty of Economics and Political Science, University of Shahid Beheshti University, Tehran, Iran.

2 Business Cycles, Growth and Public Finances, Institute for Advanced Studies, Vienna, Austria.

Abstract

Due to the role of international reserves in eliminating disequilibrium in the balance of payments and the foreign exchange market, and their interaction with the money market, we try to answer two main questions regarding international reserves by focusing on the precautionary and monetary approaches. For this purpose, the paper is divided into two sections. In the first section, adapted to the Iranian economy, we present an optimization model based on utility maximization to calculate the optimal level of international reserves against sudden stops in capital inflows. Based on annual data for 1974–2021, the optimal ratio is about 10.5% of GDP per year in the basic scenario. In the second part, we examine the determinants of international reserves (IR). Applying the Autoregressive Distributed Lag (ARDL) technique, the results confirm that an excess of money demand (supply) causes an inflow (outflow) of IR, as postulated by the monetary approach to the balance of payments. According to the precautionary approach, adjustment costs and external debt positively affect the demand for IR. Furthermore, due to the conditions of the Iranian economy and the central bank's intervention in the foreign exchange market, as the exchange rate increases, the volume of IR decreases.

Keywords

Main Subjects

References

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Iranian Economic Review
Volume 30, Issue 1
March 2026
Pages 206-232

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