The International Reserves Issue in the EMU |
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Authors: | Jørgen Drud Hansen Roswitha M King Virmantas Kvedaras |
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Institution: | 1.Aalborg University,Aalborg,Denmark;2.Aarhus School of Business,Aarhus University,Aarhus,Denmark;3.?stfold University College,Halden,Norway;4.Department of Econometric Analysis, Faculty of Mathematics and Informatics,Vilnius University,Vilnius,Lithuania;5.Vilnius Management School,Vilnius,Lithuania |
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Abstract: | This paper examines the effects of the Economic and Monetary Union on demand for foreign reserves. The traditional theory
on demand for international reserves assigns a pivotal role to imports. However, in a currency union part of imports are settled
in the common currency, leaving no incentive for keeping foreign reserves. Moreover, the pooling of the demand for reserves
in the currency union and an increasing role of a currency as an international reserve currency may also influence, among
other things, the union demand for reserves. Based on estimated demand functions for reserves it is shown that the Economic
and Monetary Union has reduced the demand for reserves substantially. It is argued that an enlargement with new member countries
of the European Union will result in further savings of reserves. A simple calculation at the end of the paper illustrates
the welfare gain associated with the reduced need of reserves in the Economic and Monetary Union. |
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