| Abstract: | Summary The need for reserves under various degrees of exchange rate flexibility is discussed. In line with current thinking it is held that the need for reserves is generally smaller under conditions of limited exchange rate flexibility than under stable exchange rates. Contrary to the widespread belief that there is no need for holding reserves under freely floating exchange rates, it is argued that as long as there is a distinct possibility that freely floating rates will involve adjustment costs there is a strong case for the retention of some reserves by the monetary authorities.The author, currently on leave of absence as technical assistant to the Executive Director from the Netherlands of the IMF, is an official in the International Affairs Department of the Nederlandsche Bank. He wishes to thank Dr. P. Lieftinck, J. J. Polak, Dr. H. W. J. Wijnholds, Dr. J. H. Williamson, Mr. D. H. Boot and Mr. J. P. Th. Zwartjes for their helpful comments on an earlier draft of this paper. The responsibility for the views expressed is, however, entirely his own and cannot be interpreted as representing those of the institution where he is employed. |
