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Sustainable management of central banks’ foreign exchange (FX) reserves

Author

Listed:
  • Fender, Ingo
  • McMorrow, Mike
  • Zulaica, Omar

Abstract

Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One key motivation is the need to mobilise funds for the large-scale public sector investment required to reach the goals of the Paris Agreement on climate change. This paper explores the role central banks’ foreign exchange (FX) reserves portfolios can play in this context. Central banks’ frameworks for managing FX reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Incorporating sustainability requires expanding this usual triad into a tetrad. This can be achieved either explicitly, by introducing new economic uses of reserves, or implicitly, by recognising the ways in which sustainability affects existing policy objectives – or through a combination of both approaches. Pursuing sustainability, however, may give rise to trade-offs over and above the usual tensions between liquidity and safety and return. This paper explores sustainability-enhanced reserve management in the context of these trade-offs and outlines 12 different channels (classified into four different types) that reserve managers can use to ‘green’ their operations. Each of these channels comes with its own advantages and limitations, so – given the constraints faced at the individual reserve manager’s level – choosing the right channels is key.

Suggested Citation

  • Fender, Ingo & McMorrow, Mike & Zulaica, Omar, 2022. "Sustainable management of central banks’ foreign exchange (FX) reserves," LSE Research Online Documents on Economics 115540, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:115540
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    File URL: http://eprints.lse.ac.uk/115540/
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    References listed on IDEAS

    as
    1. Claudio Borio & Jannecke Ebbesen & Gabriele Galati & Alexandra Heath, 2008. "FX reserve management: elements of a framework," BIS Papers, Bank for International Settlements, number 38.
    2. Jochen M. Schmittmann & Han Teng Chua, 2021. "How Green are Green Debt Issuers?," IMF Working Papers 2021/194, International Monetary Fund.
    3. Dora Xia & Omar Zulaica, 2022. "The term structure of carbon premia," BIS Working Papers 1045, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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