Optimizing the Level of International Reserves of Central Bank of Islamic Republic of Iran During 1961-2004

According to the definition, the international reserves consist of the international cash assets, which the central bank of every country keeps in order to reach some goals, for example: interfering in the foreign exchange market and financing the balance-of-payments deficit. On one hand, the central banks encounter with the holding of the international reserves for financing the balance-of-payments deficit and on the other hand, holding these reserves involves opportunity costs. Therefore, the monetary officials of countries pursue optimizing their international level of reserves. The special economic conditions of the country, such as the severe economic dependency to incomes from oil selling, lacking of the necessary flexibility in the foreign exchange, commercial limitations and controlling the capital flows, insufficient availability to the international financial markets, lacking of a comprehensive management of the foreign exchange debts, and incidence of different events and its effects upon the economy of the country in recent years, such as the oil shock of 1973, have caused in determining the optimized level of the international reserves to be very important economically. In this Article, we used the dynamic optimization model and the econometrics approaches in order to determine the optimized level of the international reserves of Central Bank of The Islamic Republic of Iran during 1961-2004.We used the model of Frankel, Jovanovic based upon Bamol’s and Toobin’s buffer stock (inventory) model, and models of ARCH and GARCH. The findings show that the real reserves level is different of the optimized reserves level in the studied years. The real reserves level is lower than the optimized reserves level. Also, the findings show that the real reserves level was higher than the optimized reserves level when Iran faced with the severe increase in the oil price.