Explain in details official reserves.?

Question

Internaltional economics

Answer 1

Each country's central bank holds gold and foreign currencies as "official reserves". The foreign currency is usually held in the form of treasury bills (short-term government securities, most commonly with a term at issue of 90 days). Typically about 80% is held in US dollars and the rest in Swiss francs, euros, sterling and yen. The purpose is to be able to intervene in the currency market to arrest a run on the domestic currency when foreign sellers heavily outweigh buyers and prop up the exchange rate. If the cause of the run is real concern about the country being overborrowed or its govt becoming unstable or wahtever, this kind of intervention is invariably futile. At best it buys the government a few days or weeks to decide what to do to face the real crisis. If the problem is mindtalk, vigorous central bank action (selling reserves), especially if along with a rise in interest rates, may well be effective to tide the exchange rate over the crisis while panic subsides and the truth emerges. Reserves are virtually irrelevant for major countries because billions of dollars change hands every week in the currency market and any country's reserves are tiny by comparison (even japan's), but they can make a diffrence for a smaller country like Thailand or Mexico.