OPTIMAL LEVEL OF FOREIGN RESERVES – EXAMPLE OF BOSNIA AND HERZEGOVINA

Abstract

The paper points to the conceptualdefinition of foreign exchange reserves, the role,importance and objectives for holding foreignexchange reserves as well as evaluating the requiredamount of foreign exchange reserves, or adequacy offoreign exchange reserves. Foreign exchangereserves are important assets in each country andthey are significantly affected by monetary policy,exchange rate policy or regulation and externalinstability and the impact of the crisis that may comefrom the environment. This paper presents a simpleway of estimates of adequacy and optimality offoreign exchange reserves, which are basis for theanalysis of foreign exchange reserves, as well as inthe construction of statistical and mathematicalmodels that detail the optimal level of internationalreserves. Special review was paid to the assessmentof the adequacy of foreign exchange reserves ofBosnia and Herzegovina, and the Central Bank ofBosnia and Herzegovina.