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Currency movements drive reserve composition

Author

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  • Robert N McCauley
  • Tracy Chan

Abstract

A long-standing puzzle in international finance is the durability of the dollar's share of foreign exchange reserves - which remains above 60%, while the weight of the US economy in global output has fallen to less than a quarter. We argue that the dollar's role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates - the "dollar zone". If a currency varies less against the dollar than against other major currencies, then a reserve portfolio with a substantial dollar share poses less risk when returns are measured in domestic currency. Time series and cross-sectional evidence supports the link between currency movements and the currency composition of reserves.

Suggested Citation

  • Robert N McCauley & Tracy Chan, 2014. "Currency movements drive reserve composition," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:1412e
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ito, Hiro & McCauley, Robert N., 2019. "A key currency view of global imbalances," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 97-115.
    2. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2017. "Balance sheet effects on monetary and financial spillovers: The East Asian crisis plus 20," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 258-282.
    3. Dong He & Paul Luk & Wenlang Zhang, 2016. "Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 295-323, August.
    4. Robert N McCauley & Chang Shu, 2018. "Recent RMB policy and currency co-movements," BIS Working Papers 727, Bank for International Settlements.
    5. 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.
    6. Ito, Hiroyuki & McCauley, Robert N. & Chan, Tracy, 2015. "Currency composition of reserves, trade invoicing and currency movements," Emerging Markets Review, Elsevier, vol. 25(C), pages 16-29.
    7. Ahmed, Rashad, 2020. "Monetary Policy Spillovers under Intermediate Exchange Rate Regimes," MPRA Paper 98852, University Library of Munich, Germany.
    8. Ito, Hiro & McCauley, Robert N., 2020. "Currency composition of foreign exchange reserves," Journal of International Money and Finance, Elsevier, vol. 102(C).
    9. Mr. Camilo E Tovar Mora & Tania Mohd Nor, 2018. "Reserve Currency Blocs: A Changing International Monetary System?," IMF Working Papers 2018/020, International Monetary Fund.
    10. 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.
    11. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2020. "Financial Spillovers and Macroprudential Policies," Open Economies Review, Springer, vol. 31(3), pages 529-563, July.
    12. Ahmed, Rashad, 2021. "Monetary policy spillovers under intermediate exchange rate regimes," Journal of International Money and Finance, Elsevier, vol. 112(C).
    13. 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).

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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