OPTIMAL LEVEL OF FOREIGN RESERVES – EXAMPLE OF BOSNIA AND HERZEGOVINA

Abstract

The paper points to the conceptual
definition of foreign exchange reserves, the role,
importance and objectives for holding foreign
exchange reserves as well as evaluating the required
amount of foreign exchange reserves, or adequacy of
foreign exchange reserves. Foreign exchange
reserves are important assets in each country and
they are significantly affected by monetary policy,
exchange rate policy or regulation and external
instability and the impact of the crisis that may come
from the environment. This paper presents a simple
way of estimates of adequacy and optimality of
foreign exchange reserves, which are basis for the
analysis of foreign exchange reserves, as well as in
the construction of statistical and mathematical
models that detail the optimal level of international
reserves. Special review was paid to the assessment
of the adequacy of foreign exchange reserves of
Bosnia and Herzegovina, and the Central Bank of
Bosnia and Herzegovina.