International Reserves Holdings in the CEMAC Area: Adequacy and Motives

What is it about?

The main objective of this paper is to investigate CEMAC’s demand for international reserves, with an emphasis on the role of the monetary disequilibrium. Prior to this task, we assess CEMAC’s position in terms of reserve adequacy. Using some relevant measures of reserve adequacy, we find that CEMAC countries have sufficient international reserves to meet the minimum adequacy requirements. To better analyze CEMAC’s international reserves demand, we extend the usual buffer stock model to account for overall economic growth and imports. Moreover, an importance is given to the devaluation of the CFA franc, the peg of this currency to the euro, and the effect of the recent Global Financial Crisis. Using quarterly data from 1985:1 to 2009:4, we show that the long-run reserve demand in the CEMAC area can be described as a function of uncertainty and economic growth. It also appears that a disequilibrium in the money market significantly affects reserve demand in the CEMAC area. Moreover, both the devaluation of the CFA franc and the peg of this currency to the euro positively affect the demand for international reserves in the short run. Finally, there is evidence of an inertia in the reserve management of the central bank.

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