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Does foreign exchange reserve decumulation lead to currency appreciation?

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  • Kathryn M.E. Dominguez
  • Rasmus Fatum
  • Pavel Vacek

Abstract

Many developing countries have increased their foreign reserve stocks dramatically in recent years, often motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every daythese sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 48.

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Date of creation: 2010
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Handle: RePEc:fip:feddgw:48

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Keywords: Foreign exchange ; Monetary policy ; International economic relations;

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  1. Scalia, Antonio, 2008. "Is foreign exchange intervention effective? Some microanalytical evidence from the Czech Republic," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 529-546, June.
  2. Fatum, Rasmus, 2008. "Daily effects of foreign exchange intervention: Evidence from official Bank of Canada data," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 438-454, April.
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  4. Fatum, Rasmus & Pedersen, Jesper, 2009. "Real-time effects of central bank intervention in the euro market," Journal of International Economics, Elsevier, vol. 78(1), pages 11-20, June.
  5. Jonathan Kearns & Roberto Rigobon, 2003. "Identifying the Efficacy of Central Bank Interventions: Evidence from Australia," RBA Research Discussion Papers rdp2003-04, Reserve Bank of Australia.
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  8. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
  9. Alvaro Almeida & Richard Payne & Charles Goodhart, 1997. "The Effects of Macroeconomic News on High Frequency Exchange Rate Behaviour," FMG Discussion Papers dp258, Financial Markets Group.
  10. Holub, Tomáš, 2004. "Foreign exchange interventions under inflation targeting: the Czech Experience," Research Notes 17, Deutsche Bank Research.
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Cited by:
  1. Dominguez, Kathryn M.E., 2012. "Foreign reserve management during the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2017-2037.
  2. Dominguez, Kathryn M.E. & Hashimoto, Yuko & Ito, Takatoshi, 2012. "International reserves and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 388-406.

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