The Optimal Official Foreign Exchange Reserves Composition for the Period 1999-2007(A Case Study of Selected Oil Producing Middle - East Economies)

Foreign exchange reserves management is a main part of international monetary system that determines the optimum value and optimum exchange composition of foreign reserves. Recently new emerging market countries as well as crude oil exporting economies have accumulated huge stocks of foreign reserves. But the optimality of the composition of these reserves is doubtful. In today’s world economy in which such phenomena as financial crises and variations in the value of main currencies are occurring, the rearrangement in new foreign exchange convergences is probable. So, determining the optimal composition of foreign exchange reserves is one of the most important issues in international and financial economics studies. In this article we used the dynamic optimizing model based on Mean-Variance and Transaction Cost approaches to determine the optimum composition of foreign exchange reserves in selected Middle East crude oil exporting countries during the period 1999-2007. The results show that it is necessary for selected economies to revise their foreign exchange reserves so that to decrease foreign reserves depreciation risk and upgrading their ability to debts repayments.