A related issue, which is a corollary of the prevalent intermediate regimes in respect of exchange rates, concerns the need, if any, for foreign exchange reserves. In a regime of free float, it could be argued that there was really no need for reserves. If demand for foreign exchange is higher than supply, exchange rates will depreciate and equilibrate demand and supply over time.
If supply exceeded demand, exchange rates will appreciate and sooner or later, the two will equalise at some price. However, today in the light of volatility induced by capital flows and the self-fulfilling expectations that this can generate, there is now a growing consensus that emerging market countries should, as a matter of policy, maintain “adequate” reserves.