| Sumario: | The article presents a structural model of the supply and demand for Eurodollars. Researcher John Makin deserves credit for attacking a subject with such formidable problems, but his model reflects some confusion as to the appropriate view the Eurodollar market. He also draws some questionable conclusions, given limitations that arise because of the short time period and small data sample. Makin recognizes that Eurobank reserves are not a given quantity. He observes that unlike the case with commercial banks in closed economies, where reserves may be taken to be exogenously determined by actions of the central bank, the reserves held by Euro-banks are endogenously determined as precautionary balances held by Eurobanks. The apparent parabolic growth path displayed by Eurodollar deposits so far is consistent with theories of the early stages of a new product. The path of Eurodollar expansion can be formulated as a cumulative response to a gradually recognized cost advantage. Most Eurodollar deposits appear to represent a net addition to total dollar deposits and reserves do not constrain this expansion.
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