Abstract
In a recent article in this Journal x, John Makin constructs a model of international reserves demand from which he is able to draw conclusions on the relationship between international reserve holdings by a central bank and the volume of world trade. The model which Makin employs is basically a portfolio choice model. It assumes that countries have a certain portfolio of financial assets ~ which can be called upon to finance a balance of payments deficit. Their position is thus analogous to a private individual assessing the question of what proportion of his portfolio to hold in non-interest earning money versus interest earning assets. For the central bank, the choice is between non-interest, or low interest, earning reserves versus a variety of other interest earning assets. Makin assumes that the central bank will then be faced with an expected cost function for reserves, as given by the expression :
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