Studies of the official demand for international reserves have typically con sidered the variability of international receipts and payments as one of the key determinants of optimal reserve holdings. The dependence of the optimal holdings of reserves on the variability of international transactions stems from the notion that reserves serve as a buffer stock whose role is to accommodate fluctuations in external transactions; therefore, it has been generally expected that the optimal stock of reserves depends positively on the extent of these fluctuations. Furthermore, to the extent that international reserves earn a return that is lower than the market rate of interest, reserve holdings entail forgone earnings; therefore, it has been generally expected that the optimal stock of reserves depends negatively on the market rate of interest. In this paper we develop a model of the demand for international reserves which emphasises the role of these two variables-ie the role of the stochastic characteristics of external transactions and of foregone earnings-in deter mining the optimal stock of reserves. 1 Section I contains the theoretical model, Section II contains some empirical estimates with concluding remarks in