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Reserve currency allocation: an alternative methodology

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  • Srichander Ramaswamy

Abstract

This paper provides a quantitative framework for choosing the composition of reserve currencies. Assuming that the central bank's performance objectives are defined in terms of ex post returns in different currency numeraires, the currency allocation problem is formulated as a multi-objective optimisation problem. The advantage of the proposed methodology is that it does not require any explicit assumptions about the risk preferences of the central bank or knowledge of the currency numeraire. Using some proxy values for the possible range of ex post returns measured in different currency numeraires, the study shows how the currency allocation problem can be solved. In particular, the proposed method borrows the concept of the degree of satisfaction from fuzzy decision theory and maximises such a function defined on the least favourable return outcome. In this sense, the proposed method differs from standard utility-based approaches which look for solutions that are best on average. The results of the study indicate that central banks on average are dollar-based investors on the basis of current allocations. Further, the study also indicates that if central banks consider an ex post return profile that safeguards the purchasing power of the reserves, then the currency distribution of reserves should more closely resemble the SDR basket.

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  • Srichander Ramaswamy, 1999. "Reserve currency allocation: an alternative methodology," BIS Working Papers 72, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:72
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    References listed on IDEAS

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    1. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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    Cited by:

    1. Miss Yinqiu Lu & Yilin Wang, 2019. "Determinants of Currency Composition of Reserves: a Portfolio Theory Approach with an Application to RMB," IMF Working Papers 2019/052, International Monetary Fund.
    2. Mateane, Lebogang, 2020. "Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?," EconStor Preprints 227484, ZBW - Leibniz Information Centre for Economics.
    3. Mateane, Lebogang, 2023. "Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?," Research in Economics, Elsevier, vol. 77(3), pages 402-418.
    4. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    5. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    6. Chinn, Menzie D. & Ito, Hiro & McCauley, Robert N., 2022. "Do central banks rebalance their currency shares?," Journal of International Money and Finance, Elsevier, vol. 122(C).
    7. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.
    8. Aristovnik, Aleksander & Čeč, Tanja, 2010. "Compositional Analysis Of Foreign Currency Reserves In The 1999-2007 Period. The Euro Vs. The Dollar As Leading Reserve Currency," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 165-181, March.

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