Currency Composition Of Reserves Research Articles

Mars or Mercury? The geopolitics of international currency choice*

SummaryWe assess the role of economic and security considerations in the currency composition of international reserves. We contrast the ‘Mercury hypothesis’ that currency choice is governed by pecuniary factors familiar to the literature, such as economic size and credibility of major reserve currency issuers, against the ‘Mars hypothesis’ that this depends on geopolitical factors. Using data on foreign reserves of 19 countries before World War I, for which the currency composition of reserves is known and security alliances proliferated, our results lend support to both hypotheses. We find that military alliances boost the share of a currency in the partner’s foreign reserve holdings by about 30 percentage points. These findings speak to the implications of possible US disengagement from global geopolitical affairs. In a hypothetical scenario where the United States withdraws from the world, our estimates suggest that long-term US interest rates could rise by as much as 80 basis points, assuming that the composition of global reserves changes but their level does not.

Currency composition of reserves, trade invoicing and currency movements

This article analyses the relationships among the unit of account and means of exchange functions of an international currency, on the one hand, and its store of value in official use, on the other hand. Historical evidence links the currency composition of reserves to currency movements. The currency composition of reserves is strongly related in the cross-section to both currency movements and the currency denomination of trade. Data limitations make it hard to distinguish these two factors. A panel analysis of 5 countries from central and Eastern Europe shows that both trade invoicing and currency movements drive changing official reserve composition. Implications are suggested for the prospects for the renminbi enlarging its current small portion of official foreign exchange reserves.

Survey of Reserve Managers: Lessons from the Crisis

This paper reports in detail on a survey that was circulated to reserve managing central banks of IMF member countries in April 2012. The survey aims to gain further insight into how reserve managers have reacted to the crisis to date. The survey also aims to understand how reserve managers arrive at their strategic asset allocation and how they operate their risk management frameworks in practice. Some of the key themes that emerge from the survey include potential procyclical and counter cyclical behavior by reserve managers, increased focus placed on returns and wide variability across countries in how the currency composition of reserves is derived.

India's International Reserves: How Large and How Diversified?

Asymmetric foreign exchange intervention by the Reserve Bank of India (RBI) has resulted in a sustained accretion of India’s foreign exchange reserves. The reserve buildup in India has certainly been impressive, rising from around US$5-6 million in 1991, to nearly US$300 billion in mid 2008. In addition to addressing the issues of reserve adequacy, this paper examines the forms the reserves have taken (asset and currency composition), and the extent to which India’s reserve holdings are diversified. The issue of reserve adequacy was made apparent during the 1990s and early 2000 when rapid reserve depletion became a defining and determining feature of the series of currency crises that hit emerging economies. In order to assess the adequacy of India’s stock of international reserves, the paper considers a few standard measures used in literature and finds that India’s reserve stock is more than adequate, placing them in a much better position than many other emerging economies. The paper goes on to examine the asset and currency composition of such reserves. More than 50 percent of India’s reserve holdings have been in the form of foreign currencies and deposits as cash, followed by investments in foreign securities and gold deposits, in that order, reflecting a high degree of risk aversion by the RBI in the management of the reserves. While data on asset composition are available, the currency composition of reserves is a well-guarded secret. Hence the paper undertakes some simulation exercises to arrive at some reasonable guesstimates of such a composition. The paper also makes use of the Treasury International Capital Reporting System (TIC) data to track India’s investments in the U.S. securities, thereby assessing the weight of U.S. dollar assets in India’s reserve holdings.

On the composition of Asian central bank reserves: Will the euro replace the dollar?

Recent discussion in the financial markets has considered the possibility that Asian central banks might be shifting some of their international reserve holdings out of the dollar and into the euro. Prompted by this recent interest, we empirically examine the composition of central bank reserves in Japan, China, and Korea. The currency composition of reserves is a well-guarded secret for these central banks, so we offer statistical estimates of the quantity of euro reserves held based on the time series properties of total reserves and the value of the euro. We find that, over the period 1999–2004, euro reserves may average 1/3 of the total reserves of these countries. In contrast, in the pre-euro period 1993–1998, reserves in currencies that were replaced by the euro were generally insignificant. Because there has been a large build-up of foreign currency reserves in Asian central banks, the rise in the holdings of euros was likely accomplished without selling dollars and buying euros. However, euro acquisition must have amounted to nearly half of the large build-up in reserves. The main conclusion is that the euro is likely to be increasingly important in Asian central bank reserve portfolios, and may surpass dollar holdings if Asian central banks see the benefits of currency diversification or if Asian currencies reduce their traditional stability vis-à-vis the dollar in favor of a link to a currency basket.

The Dollar as an Official Reserve Currency Under EMU

This paper analyzes official reserve-holding behavior in the EU countries in an attempt to assess the effect EMU might have on official holdings of dollar reserves. A wide range of projections are presented for the effect of EMU on the overall demand for reserves, some based on earlier research results and some on new estimates. In the estimation and simulation of the behavior of EU countries in the last half of the 1980s, the contributions of country-specific factors appear to swamp the systematic components that had been isolated in earlier research. Earlier research results are also used to assess the effect of EMU on the currency composition of reserves. It is argued that official dollar holdings could decline on the order of 35 percent or more from current dollar holdings, although the range of uncertainty is quite large.

The Currency Composition of Foreign Exchange Reserves

This study examines the determinants of the currency composition of foreign exchange reserves for both industrial and developing countries. During the period from 1976-85, our empirical results indicate that the currency composition of reserves has been influenced by each country`s exchange rate arrangements, its trade flows with reserve currency countries, and the currency of denomination of its debt-service payments. The evidence is consistent with the view that managing the currency composition of a country`s net foreign asset position is done more cheaply by altering the currency of denomination of assets and liabilities that are not held as reserve assets.

The Currency Composition of Foreign Exchange Reserves

This study examines the determinants of the currency composition of foreign exchange reserves for both industrial and developing countries. During the period from 1976-85, our empirical results indicate that the currency composition of reserves has been influenced by each country`s exchange rate arrangements, its trade flows with reserve currency countries, and the currency of denomination of its debt-service payments. The evidence is consistent with the view that managing the currency composition of a country`s net foreign asset position is done more cheaply by altering the currency of denomination of assets and liabilities that are not held as reserve assets.