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March 1982

Central Banks' Demand for Foreign Reserves Under Fixed and Floating Exchange Rates

by Dallas S. Batten

The international monetary system has experienced significant changes during the 1970s. The most dramatic of these has been the transformation from a system of pegged exchange rates to one in which central banks make no institutional commitment to maintain a particular exchange rate. Despite this change, central banks have been unwilling, in general, to allow their exchange rates to be completely market-determined and, consequently, continue to hold foreign reserves. The primary focus of this article is to analyze central banks’ demand for foreign reserves in light of this institutional change.