Journal of Business & Economic Policy

A Utility Function Explanation of the Empirical Behavior of Income Relative to International Reserves for Selected Economies
Pook Carson; James P. Gander

Abstract
The purpose of this paper is to explore an economy-wide utility model to explain the empirical behavior of national income relative to international reserves for selected economies. The empirical behavior is taken as the observed optimal outcome from a macroeconomic general equilibrium model which is not specified here but presumed to exist based on the general literature covering the topic. The model uses an economy-wide preference (utility) function as its objective function of two variables, national income and international reserves. The empirical data consist of the ratio of income to reserves for a selected number of mature and developing economies over the time period 1970 to 2011. For mature economies, the ratio is trending upwards, while for the developing economies, the ratio is trending downwards. It is this phenomenon that we attempt to explain in terms of the relative strength of the utilities for income versus reserves. The policy implications are discussed briefly within the context of the existing literature on international reserves.

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