Abstract
462. The functions and objectives of holding reserves determine the reserve management strategy of the Czech National Bank (CNB). There are two main functions of reserves. The first is to serve as a source of liquid funds for meeting known and potential foreign liabilities and obligations of the central bank. In a wider sense, the obligations of the CNB are (i) to meet foreign exchange intervention requirements; (ii) to meet foreign exchange payments of CNB’s clients (of which the government is the most dominant one); and (iii) as a “backup” for meeting balance of payments crises. The second function is to serve as a form of national wealth, although it is only the central bank that has access to reserves. Foreign exchange reserves are a by-product of the monetary and exchange rate policy of the central bank. Due to the exchange rate regime and other developments since 1993, foreign exchange inflows are being absorbed into reserves. The foreign exchange inflows in the form of foreign direct investment (FDI) or speculative capital put pressure on the domestic currency, and by reverse interventions, the foreign exchange is accumulated in foreign exchange reserves of the CNB.
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