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Measurement and Inference in International Reserve Diversification

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  • Anna Wong

    (University of Chicago)

Abstract

This paper analyzes international reserve diversification by examining changes in quantity shares of currencies held in foreign exchange reserves. It discusses alternative methodologies for constructing quantity shares and applies the preferred methodology to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund’s Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings. What can one infer from available data about the diversification of foreign exchange reserves since 1999? The analysis suggests four conclusions: (1) The behavior of the quantity shares of the US dollar and the euro in total reserves is consistent with net stabilizing intervention; their quantity shares tend to rise when these currencies are declining and vice versa. (2) The principal driver of this stabilizing diversification over the period 1999Q1–2005Q4 is Japan. (3) The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. (4) The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. In summary, the aggregate data conceal much diversity in the practices of individual countries.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP07-6.

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Date of creation: Jul 2007
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Handle: RePEc:iie:wpaper:wp07-6

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Keywords: Foreign Exchange Reserves; Central Banks; Methodology; Index Numbers; Aggregation;

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References

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  1. Gabriele Galati & Philip Wooldridge, 2009. "The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-23.
  2. Ewe-Ghee Lim, 2006. "The Euro's Challenge to the Dollar," IMF Working Papers 06/153, International Monetary Fund.
  3. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
  4. Philip D Wooldridge, 2006. "The changing composition of official reserves," BIS Quarterly Review, Bank for International Settlements, September.
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Cited by:
  1. Lane, Philip R. & Shambaugh, Jay C, 2007. "Financial Exchange Rates and International Currency Exposures," CEPR Discussion Papers 6473, C.E.P.R. Discussion Papers.
  2. 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.

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