International reserves and liquidity: a reassessment

This paper reassesses the literature on international reserves and liquidity from the dual perspectives of micro financial aggregation theory and recent international financial developments. The traditional simple- sum aggregates approach to defining, measuring and estimating demand for international reserves is contrasted with more recent research derived from financial aggregation theory. As in domestic monetary theory, it is argued that aggregation theory is necessary to identify reserve assets with different degrees of liquidity and other reserve services. The main conclusion reached is that the financial aggregation is warranted on theoretical, empirical and practical policy grounds because the liquidity problem of adequacy and distribution remains relevant even in the altered international environment of flexible exchange rates and growth of private capital markets.