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External debt currency denomination and the currency composition of foreign exchange reserves

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  • Lu, Dong
  • Qian, Xingwang
  • Zhu, Wenyu

Abstract

This study examines the effect of external debt currency denomination on the currency composition of foreign exchange reserves (FXR) in 51 countries from 1999 to 2019. We employ a treatment effect model in which the central bank swap lines during the 2008 global financial crisis act as a plausibly exogenous shock. Our findings indicate that higher proportions of dollar-denominated external debt led central banks to hold more US dollar in their FXR. The responsiveness of this relation diminishes in the presence of capital controls. Furthermore, we provide a theoretical model to demonstrate that the buffer stock role of FXR is a viable channel through which US dollar-denominated debt influences central banks' dollar FXR holdings.

Suggested Citation

  • Lu, Dong & Qian, Xingwang & Zhu, Wenyu, 2024. "External debt currency denomination and the currency composition of foreign exchange reserves," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:pacfin:v:86:y:2024:i:c:s0927538x24001896
    DOI: 10.1016/j.pacfin.2024.102438
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    More about this item

    Keywords

    Currency composition; Foreign exchange reserves; External debt; Buffer stock; Swap line;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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