Question

What is meant by 'official reserve transactions'? Discuss their importance in the Balance of Payments.

Answer 1

Transactions that cause changes in the official reserves of the central bank are known as official reserve transactions.

When current account balance and capital account balance is not equal to zero, there is a movement of official reserves of the central bank.

When current account balance and capital account balance is equal to zero, there is no movement of official reserves of the central bank.

Accommodating items in the balance of payments relate only to the movement of official reserves with a view to correct BoP imbalance.

Thus, official reserves are reduced when there is BoP deficit and are increased when there is BoP surplus.