Measurement and Inference in International Reserve Diversification

Wong, Anna

doi:10.2139/ssrn.1003865

Cited by 15 publications

(19 citation statements)

References 5 publications

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“…The independent variables are trade shares with major currency countries, share of debt denominated in these currencies, and exchange rate regime relations with these countries. 44 An important aspect of this work is that it is not simply the trade share with the currency in question included in each regression, but trade and debt shares with the other major currencies are included as well. That way, we can see that having a very large share of trade with Germany can reduce the share of dollars in reserve holdings, even controlling for the share of trade with the US.…”

Section: A15 Reservesmentioning

confidence: 99%

Financial Exchange Rates and International Currency Exposures

Lane

Shambaugh

2010

American Economic Review

290

275

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Our goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements. Further, we demonstrate that many developing countries hold short foreign currency positions, leaving them open to negative valuation effects when the domestic currency depreciates. However, we also show that many of these countries have substantially reduced their foreign currency exposure over the last decade. Last, we show that our currency measure has high explanatory power for the valuation term in net foreign asset dynamics: exchange rate valuation shocks are sizeable, not quickly reversed and may entail substantial wealth shocks.

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Section: A15 Reservesmentioning

confidence: 99%

Financial Exchange Rates and International Currency Exposures

Lane

Shambaugh

2010

American Economic Review

290

275

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“…It is these amounts that we used to calculate currency shares (i.e. without converting them to US dollars, which may introduce some valuation changes; see Wong 2007).…”

Section: -1969mentioning

confidence: 99%

Stability or Upheaval? The Currency Composition of International Reserves in the Long Run

Eichengreen¹,

Chițu²,

Mehl³

2015

IMF Econ Rev

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe investigate whether the role of national currencies as international reserves was fundamentally altered by the shift from fixed to flexible exchange rates (what we call the "upheaval hypothesis"), a view that gained adherents following the collapse of the Bretton Woods System. We extend standard data on the currency composition of foreign reserves backward and forward in time to test whether there was a shift in the determinants of reserve currency shares around the breakdown of Bretton Woods. We find evidence in favor of this hypothesis. The effects of inertia and the credibility of policies on international reserve currency choice have become stronger post-Bretton Woods, while those associated with network effects have weakened. We also show that negative policy interventions designed to discourage international use of a currency have been easier to implement than positive interventions to encourage international use. These findings speak to current discussions of the prospects of currencies, like the euro and the renminbi, seen to be seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it. Non-technical summaryThe demand for international reserves and its currency composition in particular have long figured importantly in the literature of international economics.Previous studies of these issues have built on a very limited evidentiary base, however. Data on the currency composition of international reserves is made available to the public by a very limited number of central banks. The IMF gathers such data from its members, but publishes only global aggregates and -more recently -breakdowns between advanced economies and emerging and developing countries.Earlier investigators have assembled these aggregated data from the IMF's website and publications starting in the early 1970s. The latter point in time conveniently coincides with the end of the Bretton Woods System, which is sometimes thought to have occasioned a shift in the demand for international reserves.These studies have yielded strong conclusions. They find that the demand for a currency as international reserves is strongly increasing in issuing country size, that persistence effects are strong and that the credibility of policies is also important, to some extent. The generality of these findings is an open question. They are derived from analysis of a limited period, from the final breakdow...

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“…Since 2005, rumours have spread that the central banks of Korea, China and Japan would shift some of their official holdings of US dollars into other currencies, most notably the euro. Indeed, it has even been shown that this diversification has already started, as some OECD central banks, such as the Bank of Canada, have already quietly reduced their share of US dollars held as foreign reserves between 2000 and 2005 (Wong, 2007, table 3) 1 . But since most of the 10 largest holders of foreign exchange reserves are located in Asia, the rumours about diversification by Asian central banks have more severe implications.…”

Section: Introductionmentioning

confidence: 99%

A Study of the Diversification of China's Foreign Reserves Within a Three‐country Stock‐flow Consistent Model

Lavoie

Zhao

2010

Metroeconomica

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The paper presents a three-country stock-flow consistent model, with one fixed exchange rate and two flexible exchange rates, in the tradition of portfolio balance models with imperfect asset substitutability. The model is applied to simulate the impact of the diversification of the foreign reserves of China, away from US dollars and towards euros. The simulation results show that China and the USA both benefit from diversification, while the Euroland economy slows down. An intriguing feature of the model is that it generates path dependence.

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Measurement and Inference in International Reserve Diversification

Cited by 15 publications

References 5 publications

Financial Exchange Rates and International Currency Exposures

Financial Exchange Rates and International Currency Exposures

Stability or Upheaval? The Currency Composition of International Reserves in the Long Run

A Study of the Diversification of China's Foreign Reserves Within a Three‐country Stock‐flow Consistent Model

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