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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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File URL: http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2012/2012sep75_3munroreddell.pdf
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Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

Volume (Year): 75 (2012)
Issue (Month): (September)
Pages: 35-45

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Handle: RePEc:nzb:nzbbul:sep2012:04

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  1. Maurice Obstfeld & Jay C.Shambaugh & Alan M.Taylor, 2003. "The Trilemma in History:Tradeoffs among Exchange Rates, Monetary Policies,and Capital Mobility," DNB Staff Reports (discontinued) 94, Netherlands Central Bank.
  2. 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.
  3. 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.
  4. Michael Gordon, 2005. "Foreign reserves for crisis management," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, March.
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