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Real exchange rate and international reserves in an era of growing financial and trade integration

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  • Aizenman, Joshua
  • Riera-Crichton, Daniel

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 cushions the impact of TOT shocks on the 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 IR in developing countries. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt6dr794sb.

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Date of creation: 01 Feb 2007
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Handle: RePEc:cdl:ucscec:qt6dr794sb

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Keywords: Real exchange rate; Terms of trade; International reserves; volatility; shock absorber;

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References

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  1. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
  2. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, vol. 18(2), pages 191-214, April.
  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. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1999. "Dualism and Macroeconomic Volatility," Scholarly Articles 4554124, Harvard University Department of Economics.
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Citations

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Cited by:
  1. 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.
  2. 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," Santa Cruz Department of Economics, Working Paper Series qt2bq3246m, Department of Economics, UC Santa Cruz.
  3. 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.
  4. 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.
  5. Aizenman, Joshua & Pinto, Brian, 2011. "Managing financial integration and capital mobility -- policy lessons from the past two decades," Policy Research Working Paper Series 5786, The World Bank.
  6. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
  7. 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.
  8. 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.
  9. Andreas Steiner, 2010. "The Accumulation of Foreign Exchange by Central Banks: Fear of Capital Mobility?," Working Papers 85, Institute of Empirical Economic Research.
  10. Andreas Steiner, 2010. "Central Banks’ Dilemma: Reserve Accumulation, Inflation and Financial Instability," Working Papers 84, Institute of Empirical Economic Research.

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