| Empirical studies of demand for international liquidity have generally concentrated on the formulation and estimation of demand functions. Supply relationships have typically been handled by assumption, the usual practice being to assume that the supply of international reserves is elastic enough to meet the demand.; The main purpose of this thesis is to develop a model of demand for the supply of international reserves. Our model differs from pervious studies in several ways. First, we have tried to eliminate the assumption of elastic supply by specifiying a supply function. Second, incorporated into the model is the gold price, which allows us to look at the proposal for which provisions were made in the International Monetary Fund articles; these suggest that one possible method of dealing with the shortage of liquidity is gold revaluation.; Using two-stage least-squares demand functions were estimated for the period 1972-1977, using quarterly data for 19 developed countries and 21 less developed countries.; The demand for international reserves is found to be elastic with respect to the official price of gold. However, it is found to be inelastic with respect to the market price of gold (dollar price of gold in London).; Considerable evidence is also found that the assumption of elastic supply is valid for less-developed countries.; Third, in order to introduce the possiblity of disequilibrium behavior into the model, an adjustment mechanism was used which led us to estimate the speed of adjustment. Estimates of the speed of adjustment are found to be the range of almost 3-30 percent, which is in sharp contrast to what previous studies have found.; The main conclusion from the study is that any model of demand for international reserves that does not take the supply side into account is biased. Furthermore, the gold price exerts a negative effect on the demand for international reserves. |
