Austria's Demand for International Reserves and Monetary Disequilibrium : The Case of a Small Open Economy with a Fixed Exchange Rate Regime

Using a vector error correction approach, I estimate Austria's demand for international reserves over the period 1985:1-1997:4 and test for short-run effects of the disequilibrium on the national monetary market. I find that Austria's long-run reserve demand can be described as a stable function of imports, uncertainty and the opportunity cost of holding reserves with strong economies of scale. The speed of adjustment takes a value of 38 per cent. The results confirm that an excess of money demand (supply) induces an inflow (outflow) of international reserves as postulated by the monetary approach to the balance of payments