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 Sciences, Shahid Bheshti University, Tehran, Iran

2 Department of Economics, University of Vienna, Vienna, Austria

10.22059/ier.2024.367692.1007839

Abstract

Due to the role of international reserves in eliminating the disequilibrium in the balance of payment and foreign exchange market and its interaction with the money market, we try to answer two main questions regarding international reserves by focusing on pre-cautionary 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 the sudden stop 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 the 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 Iranian economy and the central bank's intervention in the foreign exchange market, as the exchange rate increases, the volume of IR decreases.

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Main Subjects

Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 12 February 2024

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