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Global Impact of a Shift in Foreign Reserves to Euros

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Author Info

  • Fritz Breuss
  • Werner Roeger
  • Jan in 't Veld

Abstract

This paper considers the potential impact of a shift in official foreign reserves from dollars to euros using a global DSGE model. This paper uses QUEST III, a multi-region global DSGE model, to study the macroeconomic effects of a gradual equalization of official foreign reserves between dollars and euros. We simulate a scenario of a shift in the composition of foreign reserves holdings from the present ratio of 65 percent dollars and 25 percent euros to equal 45 percent shares over a 10 years period. We assume imperfect substitutability between financial assets to allow this shift to have real effects. Our simulations point towards small real effects due to the reduction in real interest rates resulting from this shift in official holdings.

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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 345.

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Length: 26 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:euf:ecopap:0345

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Keywords: Globalization; Global imbalances; reserve currency; euro area; DSGE modelling; Global Impact of a Shift in Foreign Reserves to Euros; Breuss ; Roeger; in 't Veld;

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References

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  1. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Wiley Blackwell, vol. 26(6), pages 873-891, 06.
  2. Chinn, Menzie & Frankel, Jeffrey, 2008. "The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency," Working Paper Series rwp08-016, Harvard University, John F. Kennedy School of Government.
  3. Elias Papaioannou & Richard Portes, 2008. "The international role of the euro: a status report," European Economy - Economic Papers 317, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2007. "Europe and Global Imbalances," IMF Working Papers 07/144, International Monetary Fund.
  5. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  6. Roland Beck & Michael Fidora, 2008. "The impact of sovereign wealth funds on global financial markets," Occasional Paper Series 91, European Central Bank.
  7. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
  8. Henderson, Dale W. & Rogoff, Kenneth, 1982. "Negative net foreign asset positions and stability in a world portfolio balance model," Journal of International Economics, Elsevier, vol. 13(1-2), pages 85-104, August.
  9. Thierry Bracke & Matthieu Bussière & Michael Fidora & Roland Straub, 2008. "A framework for assessing global imbalances," Occasional Paper Series 78, European Central Bank.
  10. Masson, Paul R., 2007. "The growing role of the euro in emerging market finance," Policy Research Working Paper Series 4381, The World Bank.
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Cited by:
  1. Fritz Breuss, 2011. "Downsizing the Eurozone into an OCA or Entry into a Fiscal Transfer Union," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 12(4), pages 05-12, December.

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