OPTIMAL MANAGEMENT OF INTERNATIONAL RESERVES

This paper develops a continuous time stochastic framework for determining optimal management policy for international reserves. By applying basic ideas of inventory management theory, the analysis integrates and extends the work of Miller and Orr, Heller, Hamada and Ueda, and Frenkel and Jovanovic. The optimal solution is obtained by minimizing total cost which is composed of transfer cost and interest cost. This solution is shown to be superior to the one obtained by Frenkel and Jovanovic in the sense of cost minimization.