Official Reserve Economics Definition

The current system of holding foreign currency and commodities as currency reserves against floating currencies dates back to 1971-73. At that time, President Richard Nixon ended the convertibility of the U.S. dollar into gold in response to the unbridled repayment of U.S. dollars by foreign governments for gold and the possibility that the U.S. would run out of gold reserves. This cut off the last official peg of the dollar and other national currencies to gold. Since then, Federal Reserve notes and bank deposits with banks can no longer be exchanged for anything other than other Federal Reserve notes. Special Drawing Rights (SDRs) were created by the IMF. The SDR is an international monetary reserve intended to supplement a country`s currency reserves. As of August 2017, China had foreign exchange reserves of $3.091 trillion. As of September 2017, the United States had $123.377 billion, while the United States had $179.192 billion.

Suppose a country has a trade deficit in a fixed exchange rate system. When the demand for imports exceeds the demand for our exports to other countries, a trade imbalance is created. Domestic demand for foreign currency is greater than international demand for domestic currency, which means that domestic demand for foreign currency is greater than international demand for domestic currency. In order to maintain exchange rate stability, the central bank should take action. If there are no more foreign claims on the national currency in the financial account, the central bank can intervene by selling foreign money for domestic currency. As a result, foreign exchange reserves would decline, leading to a balance of payments deficit. A trade deficit and a stable exchange rate imply a balance of payments deficit without a financial balance. If there is additional demand for anything, it will lead to a balance of payments deficit in foreign currencies in the private Forex market at the government-regulated exchange rate. To balance excess demand, the central bank will automatically trade in the Forex market and sell (buy) foreign exchange reserves (supply).

We can determine whether a country has a balance of payments deficit or a balance of payments surplus by tracking sales and purchases of foreign reserves in the official reserve account. Official foreign reserve assets are assets denominated in foreign currencies that are readily available to and controlled by monetary authorities to meet balance of payments financing needs, to intervene in foreign exchange markets to influence the exchange rate, and for other related purposes (for example, maintaining confidence in the currency and economy and providing the basis for borrowing abroad). They provide a very comprehensive picture of inventories at market prices, transactions, currency and market revaluations and other volume changes on a monthly basis. The global political and economic dominance of a few great powers eventually led to the introduction of gold trading standards in many countries. Under these agreements, small emerging countries, colonies, and small allies of the great powers pegged their currencies to currencies and held bank reserves in the currencies and paper notes of large countries such as the pound sterling or the US dollar. This reflects the current and capital accounts of central banks in the international balance of payments. The current account tracks a country`s imports and exports of goods, services, income and transfers, as well as whether it is a net creditor or debtor. Foreign and domestic investment, government borrowing and private sector borrowing are recorded in the capital account. Inflows or outflows of reserve assets bring the general ledger back into equilibrium when there is either a balance of payments deficit or a balance of payments surplus. The official invoice for the payment takes this into account. China has the largest foreign exchange reserves in the world, followed by Japan, Switzerland and Saudi Arabia. A monetary reserve is the stock of foreign exchange, precious metals and other highly liquid assets used to repay national currencies and bank deposits and to meet the current and short-term financial obligations of a country`s central bank, ministry of finance or other monetary authority.

These assets facilitate the regulation of the country`s currency and money supply and help manage liquidity for transactions in global markets. Reserves are an asset in a country`s balance of payments. In January 2015, the SNB abolished the Swiss franc ceiling. The SNB could no longer print francs and increase its currency reserves. The immediate consequence was a sharp rise in the Swiss franc. At the beginning of 2015, EUR/CHF was trading just above 1.2, where the ceiling had been set. After the cap was lifted, the price immediately fell below 0.98, meaning that the EUR fell dramatically and the CHF rose dramatically. Since 1971, central banks and other monetary authorities around the world have held a mix of foreign currency and sovereign debt as currency reserves. Today, foreign exchange reserves consist of debt, bonds or other financial instruments that represent promises to pay in the form of future debt instruments rather than in the form of truly useful or valuable products. Many institutions also still hold gold, domestically or on account, in vaults of the Federal Reserve Bank of New York, although these gold holdings have no official or legal connection to the supply or value of national currencies and therefore do not technically constitute currency reserves. All modern economies are characterized by monetary systems based on the issuance of circulating money in the form of bank deposits or other monetary substitutes through the fractional reserve banking process.

Banks and other issuers of new deposits hold physical cash reserves, readily marketable assets and own reserve deposits in central bank accounts equivalent to a fraction of their total deposits to meet the cash withdrawal demand of their customers and other creditors. Central banks, government bonds and other national or international monetary authorities also hold reserves of precious metals, liquid assets and paper notes against claims from banks and financial institutions. These represent currency reserves and represent the basis on which a country`s money supply is built like a pyramid through the reserve lending system in the banking and financial system. The official reserve is the stock of gold reserves, special drawing rights and tradable foreign currency of a country.