The Adequacy Of Foreign Exchange Reserves

The adequacy of the foreign exchange reserves is generally expressed as the percentage of short term foreign debt, the currency supply, or the average number of imports in a month. However, sometimes the adequacy in forex reserves is also represented as in absolute level.

There are numbers of economies of the world which try hard to maintain adequacy in foreign exchange reserves i.e. the appropriate reserve levels. On the other hand, a growing numbers of nations have already adequate reserve levels, a growing number of countries have accumulated a huge stocks of foreign exchange reserves. In some of the cases, the reserve foreign stocks are so huge that they leave far behind the levels of adequacy of foreign exchange reserves. The huge reserves sometimes raise a question about their necessity. These countries account for more than sixty percent of the total of the world’s forex reserves.

The most common driving force behind accumulating the large adequacy in foreign exchange reserves is to get insured again any type of currency crises in near future. It has been observed that the most 0of the countries which hold the top positions in the list of the reserve holders are emerging economies of the world.

There are some other reasons which also that led to the accumulation of forex reserves. Acquiring the adequacy in forex reserves can serve the immediate purpose. such as fighting deflation. Once acquired, however, large reserve stockpiles serve little purpose other than to serve as a precautionary fund. Infect the in the countries having advanced economies, flexible exchange rates and strong macroeconomic policies have diminished even the precautionary value of reserve holdings.

You can find detailed information about adequacy of foreign exchange reserves in various books on the internet. After the emerging market crises of the 1990s, there is abundance material available regarding the reserves necessary to adequately insure against shocks.