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Foreign currency reserves: why we hold them influences how we fund them

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This article reviews New Zealand’s approach to funding foreign currency reserves: a mix of holding foreign currency assets funded by outright purchases of foreign exchange, borrowing foreign currency long term to fund foreign currency assets, and swapping local currency assets for foreign currency assets for a long term. The use of borrowed and hedged reserves is unusual, but not unique, among floating exchange rate countries with liberalised financial markets. We consider the reasons for holding reserves, and the connection between these reasons and the costs and benefits of each of the funding options that New Zealand has chosen.

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  • Anella Munro & Michael Reddell, 2012. "Foreign currency reserves: why we hold them influences how we fund them," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 75, pages 35-45, September.
    • Handle: RePEc:nzb:nzbbul:sep2012:04
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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2012/2012sep75-3munroreddell.pdf
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    References listed on IDEAS

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    1. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
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    4. Anella Munro & Philip Wooldridge, 2011. "Motivations for swap-covered foreign currency borrowing," BIS Papers chapters, in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 19-56, Bank for International Settlements.
    5. Kelly Eckhold & Chris Hunt, 2005. "The Reserve Bank of New Zealand’s new foreign exchange intervention policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 231-41, Bank for International Settlements.
    6. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
    7. Baba, Naohiko & Packer, Frank, 2009. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1953-1962, November.
    8. Kelly Eckhold & Chris Hunt, 2005. "The Reserve Bank's new foreign exchange intervention policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, March.
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    Cited by:

    1. Ding Ding & Mr. Werner Schule & Ms. Yan M Sun, 2014. "Cross-Country Experience in Reducing Net Foreign Liabilities: Lessons for New Zealand," IMF Working Papers 2014/062, International Monetary Fund.

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