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Real Exchange Rate and International Reserves in an Era of Growing Financial and Trade Integration

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Author Info

  • Joshua Aizenman

    (UCSC and NBER)

  • Daniel Riera-Crichton

    (UCSC)

Abstract

This paper evaluates the impact of international reserves, terms-of-trade shocks, and capital flows on the real exchange rate (REER). We observe that international reserves cushion the impact of terms-of-trade shocks on REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of international reserves in developing countries. Developing countries' REERs seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.90.4.812
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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 90 (2008)
Issue (Month): 4 (November)
Pages: 812-815

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Handle: RePEc:tpr:restat:v:90:y:2008:i:4:p:812-815

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Web page: http://mitpress.mit.edu/journals/

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References

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  1. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series qt44g3n2j8, Center for International Economics, UC Santa Cruz.
  2. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1997. "Dualism and macroeconomic volatility," CEPREMAP Working Papers (Couverture Orange) 9720, CEPREMAP.
  3. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile.
  4. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
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Cited by:
  1. Andreas Steiner, 2010. "Central Banks’ Dilemma: Reserve Accumulation, Inflation and Financial Instability," Working Papers 84, Institute of Empirical Economic Research.
  2. Joshua Aizenman & Brian Pinto, 2013. "Managing Financial Integration and Capital Mobility—Policy Lessons from the Past Two Decades," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 636-653, 09.
  3. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
  4. Joshua Aizenman & Michael Hutchison & Ilan Noy, 2008. "Inflation Targeting and Real Exchange Rates in Emerging Markets," Working Papers 200810, University of Hawaii at Manoa, Department of Economics.
  5. Aizenman, Joshua & Edwards, Sebastian & Riera-Crichton, Daniel, 2012. "Adjustment patterns to commodity terms of trade shocks: The role of exchange rate and international reserves policies," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 1990-2016.
  6. Cheung, Yin-Wong & Sengupta, Rajeswari, 2010. "Accumulation of reserves and keeping up with the Joneses: the case of LATAM economies," MPRA Paper 30426, University Library of Munich, Germany.
  7. Andreas Steiner, 2010. "The Accumulation of Foreign Exchange by Central Banks: Fear of Capital Mobility?," Working Papers 85, Institute of Empirical Economic Research.
  8. Aizenman, Joshua, 2008. "Relative price levels and current accounts: an exploration," Santa Cruz Department of Economics, Working Paper Series qt6w64k75x, Department of Economics, UC Santa Cruz.
  9. Tsen, Wong Hock, 2011. "The real exchange rate determination: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 800-811, October.
  10. Al-Abri, Almukhtar, 2013. "Real exchange rate volatility, terms-of-trade shocks, and financial integration in primary-commodity exporting economies," Economics Letters, Elsevier, vol. 120(1), pages 126-129.

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