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

Abstract

We analyze how the role of different national currencies as international reserves was affected by the shift from fixed to flexible exchange rates. We extend data on the currency composition of foreign reserves backward and forward to investigate whether there was a shift in the determinants of the currency composition of international reserves around the breakdown of Bretton Woods. We find that inertia and policy-credibility effects in international reserve currency choice have become stronger post-Bretton Woods, while network effects appear to have weakened. We show that negative policy interventions designed to discourage international use of a currency have been more effective than positive interventions to encourage its use. These findings speak to the prospects of currencies like the euro and the renminbi seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it.

Mars or Mercury? The geopolitics of international currency choice*

“…Our basic specification follows previous literature (see e.g. Frankel 2007, 2008;Li and Liu 2008;Mehl 2014 andChiţu 2016). It models the choice of reserve currency as:…”

International Capital Flow Pressures

“…These valuation effects arise because central bank reserve portfolios are typically comprised of assets spanning a basket of currencies, instead of exclusively being invested in a single base currency. US dollar denominated assets, on average, represent 60 to 65 percent of total foreign reserve portfolios, with euros dominating the remainder (Goldberg, Hull and Stein, 2013;Eichengreen, Chitu and Mehl, 2016). 18 Accordingly, the value of official reserves reported in US dollar equivalents fluctuates with the exchange rate vis-à-vis the other currencies in which the reserve assets are held.…”

The Gold Pool (1961–1968) and the Fall of the Bretton Woods System: Lessons for Central Bank Cooperation

“…Only in some circumstances, 6 According to IMF statistics on foreign exchange reserves, the share of sterling in global foreign exchange reserves was around 25% (at current exchange rates) before the November 1967 sterling devaluation. This is a similar share as the Euro in 2013 (Eichengreen, Chiţu & Mehl, 2016).…”

“…Our argument echoes claims by contemporaries (as quoted in Coombs 1976, Solomon 1982, Gavin 2004, Schenk 2010 who viewed sterling as the first line of defense for the dollar and anticipated that the fall of sterling would deliver a serious blow to the credibility of the gold-dollar parity. 2 Contagion from sterling to the dollar was made possible because sterling was the second reserve currency (Eichengreen et al 2016) and, despite its decreasing role, it was still viewed by investors as a pillar of the international monetary system (Schenk 2010, Naef 2017. It was understood that a devaluation of sterling could make a devaluation of the dollar possible, while the gold-dollar peg was itself under pressure because of expansionary US monetary and fiscal policies leading to inflation (Meltzer 1991, Bordo andEichengreen 2008).…”