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Financial development, international reserves, and real exchange rate dynamics: Insights from the Europe and Central Asia region

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  • Saadaoui, Jamel

Abstract

This study examines the impact of international reserves on real exchange rate (RER) stability in the Europe and Central Asia (ECS) region, focusing on how financial development levels affect this relationship. Using panel threshold regression, the analysis reveals that international reserves significantly stabilize RER when reserves exceed 17.28 % of GDP, especially in countries with underdeveloped financial systems. The findings suggest that reserves play a more critical role in less developed financial markets, providing insights for policymakers on optimal reserve management and financial development strategies in emerging economies.

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  • Saadaoui, Jamel, 2024. "Financial development, international reserves, and real exchange rate dynamics: Insights from the Europe and Central Asia region," Finance Research Letters, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:finlet:v:70:y:2024:i:c:s1544612324013886
    DOI: 10.1016/j.frl.2024.106359
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    References listed on IDEAS

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    1. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
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    5. Aizenman, Joshua & Ho, Sy-Hoa & Huynh, Luu Duc Toan & Saadaoui, Jamel & Uddin, Gazi Salah, 2024. "Real exchange rate and international reserves in the era of financial integration," Journal of International Money and Finance, Elsevier, vol. 141(C).
    6. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
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    More about this item

    Keywords

    Real exchange rate; International reserves; Financial development; Panel threshold regression; Emerging markets; Economic stability;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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