Determination of Optimum International Reserves Level of Central Bank of Iran Using Random Walk and VAR

After collapse of Smithsonian agreement, many countries accepted floating exchange rate system, while the majority of their central banks engaged in exchanges transactions due to decreasing volatilities in exchange rate markets. By Accepting a floating exchange rate system, it is required to maintain optimal international reserves level. In this research using Random Walk model, we have determined the optimum level of international reserves for 1961-2004 period. By implementing VAR model, international reserves impulse response functions for oil price increases and the imposed war are also investigated. Random Walk model outcomes show that central banks international reserves are not according to the estimated optimum quantities, except for a few years. They are normally less than mentioned quantities. Results of the Random Walk model show that real level of reserves is less than level of optimum quantities for periods 1961-1972 and 1984-1998. moreover, real level of reserves is more than level of optimum for years 1973-1983 and 1999-2004. Analysis of impulse response functions show that oil price shocks has increased the international reserves for periods 1973-81 and 1999-2004 and the imposed war leads to decreasing the international reserves compared to the optimal level.