Abstract
The purpose of the paper is to explain the importance of foreign exchange reserves (FER) for the protection of the country from potential currency vulnerability. FER are controlled by the central monetary institution of the country - the central bank. We have witnessed many currency, financial and economic crises that have hit various parts of the world in the past three decades. If there is no appropriate and timely reaction of the central bank in crisis conditions or there is a bad choice of the exchange rate regime (ERR), it can lead to unforeseeable consequences for the economy and the entire society of the country. The paper will benefit monetary policy makers in order to review the optimality of FER and the sustainability of the current ERR.
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