Reserve-Asset Preferences in the Crisis Zone, 1958-67

Abstract

THIS STUDY PROVIDES AN ECONOMETRIC ANALYSIS of the reserve-asset behavior of the outer countries over a critical time span of the international monetary system, between 1958, the year the system entered its "crisis zone" (that stage in which the probability of collapse of the system became apparent to the participants), and 1967, when agreement was reached on the SDR reform of the system. It tests for changing reactions of these countries with respect to the confidence problem as the system moved further into the crisis zone. Such an altered behavior pattern will be denoted as "restraint" if it involves the holding of more dollars and fewer other reserve assets (primarily gold) than a country otherwise would do. This restraint has been postulated in theoretical studies by Officer and Willett [14, 15], but thus far their work has not been subjected to empirical testing. How can one determine the beginning of the crisis zone of the international monetary system? Either a stock or flow criterion may be used. The stock definition of the crisis zone was first presented in a theoretical study by Kenen [11]: it is the period in which the U.S. reserve ratio (official reserve assets to liquid liabilities to all foreigners) is below unity. This ratio exhibits a declining trend from 1951 to 1967, a trend which falls below unity in 1960. A second definition of the crisis zone is implicit in the related work of Mundell [13] l and was adopted in the later study of Officer and Willett