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

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  • 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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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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References

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  1. 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.
  2. Rodrik, Dani, 2006. "The Social Cost of Foreign Exchange Reserves," CEPR Discussion Papers 5483, C.E.P.R. Discussion Papers.
  3. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism And Macroeconomic Volatility," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1359-1397, November.
  4. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
  2. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
  3. Joshua Aizenman & Sebastian Edwards & Daniel Riera-Crichton, 2011. "Adjustment patterns to commodity terms of trade shocks: the role of exchange rate and international reserves policies," NBER Working Papers 17692, National Bureau of Economic Research, Inc.
  4. Cheung, Yin-Wong & Sengupta, Rajeswari, 2011. "Accumulation of reserves and keeping up with the Joneses: The case of LATAM economies," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 19-31, January.
  5. 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.
  6. 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.
  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. Andreas Steiner, 2010. "Central Banks’ Dilemma: Reserve Accumulation, Inflation and Financial Instability," Working Papers 84, Institute of Empirical Economic Research.
  9. 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.
  10. 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.

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