Latin American Medium-Term Import Stabilization Policies and the Adequacy of Reserves

Abstract

BOTH THE LEVEL of the international monetary reserves, however defined, held by a country at any given point of time and the variations in reserves over a period of time reflect a combination of changing circumstances and a certain pattern of economic policy decisions made by the monetary and exchange authorities.' Conversely, a broad range of policy decisions is influenced by both the existing level of monetary reserves and the level which it is desired to establish in the future. A country with large reserves has a choice between a program of overinvestment or of overconsumption which results in balance of payments disequilibrium and a depletion of reserves, and policies which maintain reserves, or even increase them further-policies which imply that some consumption and/or some investment has for the time being been foregone. On the other hand, if a country insufficiently endowed with reserves engages in large programs of investment and/or of consumption, these programs can be sustained only so long as export receipts remain high. If such a country is confronted with a drastic fall in its export income, it may have to impose a large cut in imports and in employment in order to maintain some degree of equilibrium in its balance of payments. Thus the range of interactions between policy decisions and the level of reserves is very broad and full of complexities. As was pointed out in the Fund report on the adequacy of monetary reserves presented to the Economic and Social Council in 1953,2 any general discussion of the adequacy of reserves can be fruitful only if it is related to some general objective of economic policy. This paper has the limited purpose of analyzing, for countries whose "real exports" (i.e., exports of goods and services adjusted by reference to an import