NEEDS FOR INTERNATIONAL MONETARY RESERVES, EXCHANGE-RATE FLEXIBILITY, AND JOINING A CURRENCY AREA

The needs for reserves, exchange rate flexibility and monetary policy are derived, the need being the result of an optimization problem. The level of domestic production, its variance and that of the domestic price level have been chosen as criteria of the benefits and costs. The effectiveness and costs of balance of payments adjustment, which appear to be co-determinants of the needs, are expressed in the parameters of an economic model. This shows that the need for reserves displays a one-to-one relation to quantities of the demand for money and to the balance of payments disturbance. Only the latter is a meaningful criterion for joining a currency area. © 1979 Kluwer Academic Publishers.