One item of the financial account official-reserve changes-plays a very important role in international finance. These are the funds that governments and central banks use to manage their exchange rates. We will see later in this chapter that when a country maintains a fixed exchange rate, it does so by buying and selling foreign currencies (or by “intervening” in foreign exchange markets). Such transactions show up in the balance of payments as changes in official reserves. By contrast, when countries have market-determined (or flexible) exchange rates, there is little intervention, and changes in official reserves are relatively small. In today’s increasingly integrated global ‘financial markets, financial flows are dominated by private asset transactions.
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