Kalman filter approach to estimate the demand for international reserves
A few studies have provided empirical support for the fact that the demand for international reserves experienced structural instability in 1973 and 1979 due to a change in exchange rate system and oil price shocks. Thus, under the current managed float due to exchange rate and oil price fluctuations, coefficient estimates could be time dependent. After showing that indeed, estimated coefficients are time dependent, the Kalman filter estimation method is employed and the reserve demand function for 19 industrial countries estimated. The Kalman filter approach incorporates the time-varying properties of coefficients estimates.