INTERNATIONAL FOREIGN EXCHANGE RESERVES

BULGARIAN NATIONAL BANK

Celebrating the BNB 130th Anniversary

INTERNATIONAL FOREIGN EXCHANGE RESERVES
Edited by Tsvetan Manchev, Doctor in Economics

BULGARIAN NATIONAL BANK

2009

International Foreign Exchange Reserves

Abbreviations
BNB GDP BIS b.p. EIB EC EU ESCB ECB LBNB М1 М2 М3 IMF ERMII Fed − the Bulgarian National Bank − gross domestic product − the Bank for International Settlements − basis points − the European Investment Bank − the European Commission − the European Union − the European System of Central Banks − the European Central Bank − the Law on the Bulgarian National Bank − narrow money − М1 plus quasi money − broad money − the International Monetary Fund − Exchange Rate Mechanism II − the Federal Reserve System

© The Bulgarian National Bank, 2009 © 2009 by Tsvetan Manchev et al. ISBN 978-954-8579-30-8 Published by the Bulgarian National Bank 1, Knyaz Alexander I Square 1000 Sofia telephone +359 2 9145-750 facsimile +359 2 980 2425, 980 6493 www.bnb.bg

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International Foreign Exchange Reserves

Contents
Introduction ......................................................... 11 PART ONE. Chapter 1. 1. 2. 3. 4. 5. THE THEORETICAL FOUNDATIONS Nature and Function .......................................... 19 Definition ............................................................. 19 Gold as a Foreign Reserve Assets ...................... 20 Reasons to Own and Use Foreign Reserves ...... 23 The Functions of Foreign Reserves ..................... 24 Exchange Rate Policy, Monetary Policy, and Foreign Reserves ......................................... 26 6. Foreign Reserve Adequacy ................................ 31 1. 2. 3. Financial Asset Risk and Return ........................ 36 Financial Assets .................................................. 36 Types of Asset Risk