Authors

• Mohamad Vaez ¹
• Khadijeh Nasrollahi ¹
• Amir jabbari ²

¹ Assistant Professor, University of Isfahan

² Ph.D Student, University of Isfahan

Abstract

The central banks holding of the international reserves serves as a means for financing the balance-of-payments deficit, but bears opportunity costs. Therefore, the optimal level of the international reserves is one of the monetary authorities’ major concerns. The special economic conditions of the country, such as the severe dependency of the economy on the oil exporting revenues, lacking of the necessary flexibility in the foreign exchange market, commercial limitations and controlling the capital flows, limited access to the international financial markets, poor management of the foreign debts, and various national and international shocks to the economy in recent years have made the determining of the optimal level of the international reserves very important to the Iranian economy. In this paper, we use the Frankel-Jovanovic model which is based on the Bamol’s and Tobin’s buffer stock model and apply dynamic optimization and GARCH model to determine the optimal level of the international reserves of Central Bank of the Islamic Republic of Iran for the period 1961-2004. Our findings show that the real reserves level, except for the periods of high oil revenues,  have been lower than the optimal level. 

Keywords

• International reserves
• Dynamic Optimization
• central bank
• Iran