What are the Criteria for Adequacy of International Liquidity?

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Since the factors which determine the adequacy of liquidity are, in practice, not precisely measurable, the adequacy of external liquidity cannot be exactly determined. But a country will regard its external liquidity as adequate when, in its opinion, the level of liquidity is sufficient to meet unforeseen deficits in its balance of payments, without adopting restrictive policies which inhibit national economic growth and expansion of international trade. Similarly, from the international point of view, liquidity may be characterised as adequate when the total liquidity is in accordance with its effective demand.

According to Bernstein, the test of the adequacy of international monetary reserve to imply adequate international liquidity is “whether, they are sufficient to meet cyclical and fortuitous fluctuations in international payments without undesirable restrictions on world trade.” Prof. Balough suggests that “it is the volume of payments and its instability, and not merely the visible trade, which is the rational determinant of reserve requirements for international liquidity.”

Triffin, however, suggests the ratio of gross reserves to annual imports “as a first and admittedly rough approach to the appraisal of reserve adequacy.” After studying the evolution of the reserve the 12 major countries from 1950 to 1957 he came to the conclusion that “the overall record of these post-war years strongly suggests that most of the major countries would aim at maintaining a reserve level of not less than 40 per cent in most years, feel impelled to adopt severe adjustment measures if this level fell below, let us say, 30 or 33 per cent, and consider themselves forced to take drastic measures of control in the face of any persistent or substantial contraction below that critical range.

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Similarly, the IMF study also concludes that most industrial countries “appear to have tried to achieve reserve ratios of between 30 and 50 per cent, or perhaps 40 and 50 per cent in the sense that if reserves were below these levels they tried to increase reserves and if reserves rose beyond some such level they saw fit to adopt a more expansionary policy.

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