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The Size Of Foreign Exchange Reserves And Local Currency Internationalization: Cross-Country Evidence

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  • ZHIWEN ZHANG

    (School of Global Studies, Sun Yat-sen University, Institute of Advanced International Studies, Sun Yat-sen University, Guangzhou, China)

Abstract

This paper produces the first cross-country evidence on the relationship between the size of foreign exchange reserves and local currency internationalization using a sample of Switzerland, Japan and the UK. It finds that a high ratio of foreign exchange reserves to international reserves has a significant, but negative, impact on local currency internationalization during the period 1976–2009. After controlling for interest rate differential, different indicators for long-run depreciation and volatility of exchange rates, as well as the once-in-a-century global financial crisis of 2007–2009, the above conclusion still holds. Additionally, these results are robust to different methods (Pooled OLS and Pooled IV/2SLS) and measures of the scale of foreign exchange reserves. This study is informative for any policy decisions and will provide a strategic reference for the Chinese government as it optimizes the composition of its international reserves, promotes the process of renminbi (RMB) internationalization and becomes a major power through financial development.

Suggested Citation

  • Zhiwen Zhang, 2016. "The Size Of Foreign Exchange Reserves And Local Currency Internationalization: Cross-Country Evidence," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(05), pages 1-28, December.
    • Handle: RePEc:wsi:serxxx:v:61:y:2016:i:05:n:s0217590815500812
    DOI: 10.1142/S0217590815500812
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