Demand for International Reserves in Turkey

Having an important place in the international monetary system, international reserves held by central bank usually reflect country’s economic strength in terms of international finance and trade. There are many reasons for holding international reserves by central banks such as financing the deficit in the balance of payment, managing the monetary and exchange rate policies, minimizing the negative effects of external shocks and reducing the cost of borrowing. Continuously changing and diversifying characteristics of these reasons affect the demand for reserves depending to the economic conditions of the country. Over the last ten years, there has been a tremendous increase in international reserves held by Turkish Central Bank. From 2002 to 2012, the reserves of the bank have risen from 20 billion dollars to 96 billion dollars, showing an increase more than four times. This sudden and huge increase in the foreign reserves drove us to determine and investigate the factors which induce the Turkish Central Bank to hold high level of reserves. Thus, the purpose of this study is to estimate and analyze the demand for international reserves held by central banks using the buffer stock model in the case of Turkey. The data used in the study is monthly and cover the period of 1990:03-2012:10. The buffer stock model was econometrically estimated by using the OLS method for three different models. Our findings indicate that the opportunity cost affected reserve demand much stronger than the reserve volatility in Turkish case.