Advanced Search
MyIDEAS: Login

Should larger reserve holdings be more diversified?

Contents:

Author Info

  • Beck, Roland
  • Weber, Sebastian

Abstract

The notable increase in international reserve holdings over the past decade and their use during the global financial crisis of 2008/2009 has sparked renewed interest in the analysis of the optimal level of reserve holdings, in particular in countries which are subject to sudden stops. Less attention has been given to the optimal composition of reserves and even less to the joint determination of level and composition. In light of current developments, we show that despite the common belief that higher reserve levels should go along with higher diversification to minimize the opportunity costs from holding reserves, the opposite may even be true. It depends on the factors that stand behind the increase in reserves whether increased diversification is optimal or not. We estimate for a panel of 20 countries the determinants of the currency composition of reserves and show how it is affected by the different motives of reserve accumulation. In line with the recent literature on reserve levels we find that reserve accumulation is primarily driven by precautionary motives, which in turn underpins the allocation of reserves to safe assets. While we find primarily evidence of the allocation being a function of precautionary motives, we also find some weak evidence for reserve accumulation to lead to more diversified portfolios if reserve accumulation is driven by other factors than precautionary motives. JEL Classification: F31, F33, E42, G11

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1193.pdf
Download Restriction: no

Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1193.

as in new window
Length:
Date of creation: May 2010
Date of revision:
Handle: RePEc:ecb:ecbwps:20101193

Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC

Order Information:
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Email:

Related research

Keywords: currency composition; Precautionary Motives; reserve accumulation;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hamada, Koichi & Ueda, Kazuo, 1977. "Random Walks and the Theory of the Optimal International Reserves," Economic Journal, Royal Economic Society, vol. 87(348), pages 722-42, December.
  2. Jeanne, Olivier & Wyplosz, Charles, 2001. "The International Lender of Last Resort: How Large is Large Enough?," CEPR Discussion Papers 2842, C.E.P.R. Discussion Papers.
  3. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," Working Papers id:357, eSocialSciences.
  4. Carroll, Christopher D. & Jeanne, Olivier, 2009. "A tractable model of precautionary reserves, net foreign assets, or sovereign wealth funds," CFS Working Paper Series 2009/15, Center for Financial Studies (CFS).
  5. Christopher Meissner & Nienke Oomes, 2006. "Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice," WEF Working Papers 0009, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  6. Jeanne, Olivier & Rancière, Romain, 2008. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," CEPR Discussion Papers 6723, C.E.P.R. Discussion Papers.
  7. Eduardo Levy Yeyati, 2006. "The Cost of Reserves," Business School Working Papers 2006-10, Universidad Torcuato Di Tella.
  8. Ben-Bassat, Avraham, 1980. "The optimal composition of foreign exchange reserves," Journal of International Economics, Elsevier, vol. 10(2), pages 285-295, May.
  9. Menzie D. Chinn & Jeffrey A. Frankel, 2008. "The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency," NBER Working Papers 13909, National Bureau of Economic Research, Inc.
  10. Matsuyama, Kiminori & Kiyotaki, Nobuhiro & Matsui, Akihiko, 1993. "Toward a Theory of International Currency," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 283-307, April.
  11. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
  12. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
  13. Papaioannou, Elias & Portes, Richard & Siourounis, Gregorios, 2006. "Optimal currency shares in international reserves: the impact of the euro and the prospects for the dollar," Working Paper Series 0694, European Central Bank.
  14. Clark, Peter B, 1970. "Optimum International Reserves and the Speed of Adjustment," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 356-76, March-Apr.
  15. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  16. Ricardo Caballero & Stavros Panageas, 2004. "Contingent reserves management: an applied framework," Working Papers 05-2, Federal Reserve Bank of Boston.
  17. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  18. Olivier Jeanne, 2001. "The International Lender of Last Resort," IMF Working Papers 01/76, International Monetary Fund.
  19. Linda S. Goldberg & Cedric Tille, 2005. "Vehicle Currency Use in International Trade," NBER Working Papers 11127, National Bureau of Economic Research, Inc.
  20. Eichengreen, Barry, 1998. "The Euro as a Reserve Currency," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 483-506, December.
  21. Beck, Roland & Rahbari, Ebrahim, 2008. "Optimal reserve composition in the presence of sudden stops: the euro and the dollar as safe haven currencies," Working Paper Series 0916, European Central Bank.
  22. Dellas, Harris & Bang Yoo, Chin, 1991. "Reserve currency preferences of central banks: the case of Korea," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 406-419, September.
  23. Barry J. Eichengreen & Donald J. Mathieson, 2000. "The Currency Composition of Foreign Exchange Reserves," IMF Working Papers 00/131, International Monetary Fund.
  24. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
  25. Michael P. Dooley & J. Saul Lizondo & Donald J. Mathieson, 1989. "The Currency Composition of Foreign Exchange Reserves," IMF Staff Papers, Palgrave Macmillan, vol. 36(2), pages 385-434, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Filardo , Andrew J. & Siklos , Pierre L., 2013. "Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia," BOFIT Discussion Papers 5/2013, Bank of Finland, Institute for Economies in Transition.
  2. Zhichao Zhang & Frankie Chau & Li Xie, 2013. "Accumulation of large foreign reserves in China: a behavioural perspective," Economic Change and Restructuring, Springer, vol. 46(1), pages 85-108, March.
  3. Beck, Roland & Rahbari, Ebrahim, 2011. "Optimal reserve composition in the presence of sudden stops," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1107-1127, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20101193. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.