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Foreign reserves management subject to a policy objective

Author

Listed:
  • Coche, Joachim
  • Nyholm, Ken
  • Koivu, Matti
  • Poikonen, Vesa

Abstract

This paper studies the implications of introducing an explicit policy objective to the management of foreign reserves at a central bank. A dynamic model is developed which links together reserves management and the exchange rate by foreign exchange interventions. The exchange rate is modelled as a mean-reverting autoregressive process incorporating a linear response to interventions. The premise is that it is the objective of the central bank to prevent undervaluation of its currency. Given this objective, the model is formulated in a one- and a multi-period setting and solved to find the optimal asset allocation. The results show that asset allocation can significantly help in achieving the desired policy objective. JEL Classification: G11, F31

Suggested Citation

  • Coche, Joachim & Nyholm, Ken & Koivu, Matti & Poikonen, Vesa, 2006. "Foreign reserves management subject to a policy objective," Working Paper Series 624, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2006624
    Note: 443962
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp624.pdf
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    Citations

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    Cited by:

    1. Vitale, Paolo, 2006. "A Market Microstructure Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5468, C.E.P.R. Discussion Papers.
    2. Zhang, Dewei & Wang, Yiqi & Wang, Jingjing & Xu, Weidong, 2013. "Liquidity management of foreign exchange reserves in continuous time," Economic Modelling, Elsevier, vol. 31(C), pages 138-142.

    More about this item

    Keywords

    exchange rate modelling; foreign exchange intervention; Foreign reserves management; optimal asset allocation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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