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Author Hviding, Ketil ♦ Ricci, Antonio ♦ Ricci, Luca Antonio
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Building International Reserve ♦ South Africa ♦ Forward Book ♦ Exchange Rate ♦ Currency Crisis ♦ Foreign Exchange Intervention ♦ Foreign Exchange ♦ South African Reserve Bank ♦ Additional Gross Reserve ♦ Gross International Reserve ♦ Short-term External Debt ♦ Analytical Framework ♦ Perceived Value ♦ Net Forward Sale ♦ Credible Floating Exchange Rate ♦ Foreign Currency Liability ♦ International Liquidity Position ♦ Net Benefit ♦ Appropriate Reserve Target ♦ Reserve Position ♦ External Vulnerability
Abstract The South African Reserve Bank (SARB) achieved a milestone in May 2003. By eliminating the negative net open forward exchange position (NOFP), 1 a source of external vulnerability was removed (Figure 11.1). Since then, the SARB has continued to strengthen its reserve position, first by eliminating the forward book and then by accumulating additional gross reserves, reaching the same as its stock of short-term external debt by mid-2004 (Figure 11.2). This begs the question: how large a stock of reserves should South Africa accumulate? Or, more fundamentally, why should a country with a credible floating exchange rate build up reserves at all? This chapter presents an analytical framework that can be used to determine an appropriate reserve target for South Africa. It is suggested that this target can be usefully analyzed as depending on the perceived value of these benefits—identified as stemming from a reduction in the probability of a currency crisis, in the volatility of the exchange rate, and in the cost of borrowing—weighed against the cost of holding reserves. The chapter also highlights that some of the benefits of holding reserves apply to floaters and nonfloaters alike, and are independent of the foreign exchange intervention. More concretely, it is argued that the net benefits of holding 1 The NOFP was defined as gross international reserves of the SARB minus its foreign currency liabilities and net forward sales of foreign exchange. In March 2004, the NOFP was renamed “international liquidity position, ” reflecting the closing of the forward book.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Article