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Accounting for Reserves

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  • Tamim Bayoumi
  • Christian Saborowski

Abstract

Views on the effectiveness of sterilized reserve intervention vary. Sterilized intervention is generally seen as ineffective in advanced countries while persistent intervention by some emerging markets is often cited as contributing to undervalued exchange rates and current account surpluses. This paper argues that capital controls reconcile these views. We find strong and highly robust evidence that sterilized intervention is fully offset by outflows of private money in countries without controls, while controls partially block this offset. For a country with extensive capital controls, every dollar in additional reserves increases the current account by some 50 cents. This is mainly offset by an opposite adjustment in the current account of the United States—the dominant reserve currency issuer with the deepest and most liquid bond markets—with a smaller diversion to other emerging markets.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/302.

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Length: 37
Date of creation: 21 Dec 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/302

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Keywords: Capital controls; Reserves; Intervention; Reserves accumulation; Emerging markets; Developed countries; Reserve accumulation; global imbalances; current account; capital account; current accounts; capital account liberalization; reserve assets; capital account openness; capital accounts; reserve currency; reserve holdings; current account imbalances; global current account; open capital accounts; current account deficit; closed capital account; global current account imbalances; central banks; closed capital accounts; current account surplus; capital account restrictions; reserve currencies; reserve bank; current account deficits; current ? ? account; current account surpluses; domestic currency; short-term debt;

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References

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  1. Gruber, Joseph W. & Kamin, Steven B., 2007. "Explaining the global pattern of current account imbalances," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(4), pages 500-522, June.
  2. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(487), pages 390-411, 04.
  3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 223-250, November.
  4. Neely, Christopher J., 2008. "Central bank authorities' beliefs about foreign exchange intervention," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(1), pages 1-25, February.
  5. Menzie D. Chinn & Barry Eichengreen & Hiro Ito, 2011. "A Forensic Analysis of Global Imbalances," NBER Working Papers 17513, National Bureau of Economic Research, Inc.
  6. Joseph E. Gagnon, 2012. "Global Imbalances and Foreign Asset Expansion by Developing Economy Central Banks," Working Paper Series, Peterson Institute for International Economics WP12-5, Peterson Institute for International Economics.
  7. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Working Papers, Federal Reserve Bank of St. Louis 2005-030, Federal Reserve Bank of St. Louis.
  8. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
  9. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1356-69, December.
  10. 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, Elsevier, vol. 26(3), pages 383-402, April.
  11. Dennis Quinn & Martin Schindler & A Maria Toyoda, 2011. "Assessing Measures of Financial Openness and Integration," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(3), pages 488-522, August.
  12. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2012. "Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy," NBER Working Papers 18431, National Bureau of Economic Research, Inc.
  13. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  14. Joseph E. Gagnon, 2013. "The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances," Working Paper Series, Peterson Institute for International Economics WP13-2, Peterson Institute for International Economics.
  15. Blanchard, Olivier J & Milesi-Ferretti, Gian Maria, 2010. "Global Imbalances: In Midstream?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7693, C.E.P.R. Discussion Papers.
  16. Christopher J. Neely, 2011. "A foreign exchange intervention in an era of restraint," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 303-324.
  17. Luca Antonio Ricci & Thierry Tressel & Dennis B. S. Reinhardt, 2010. "International Capital Flows and Development," IMF Working Papers 10/235, International Monetary Fund.
  18. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  19. Christopher J. Neely, 2011. "The great foreign exchange intervention of 2011," Economic Synopses, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis.
  20. MArcio Gomes Pinto Garcia, 2011. "Can Sterilized FX Purchases under Inflation Targeting be Expansionary?," Textos para discussão, Department of Economics PUC-Rio (Brazil) 589, Department of Economics PUC-Rio (Brazil).
  21. Dennis P. Quinn & A. Maria Toyoda, 2008. "Does Capital Account Liberalization Lead to�Growth?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(3), pages 1403-1449, May.
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Citations

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Cited by:
  1. Santiago García-Verdú & Manuel Ramos Francia, 2014. "Interventions and Expected Exchange Rates in Emerging Market Economies," Working Papers, Banco de México 2014-11, Banco de México.
  2. Tamim Bayoumi & Franziska Ohnsorge, 2013. "Do Inflows or Outflows Dominate? Global Implications of Capital Account Liberalization in China," IMF Working Papers 13/189, International Monetary Fund.
  3. Joseph E. Gagnon, 2013. "The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances," Working Paper Series, Peterson Institute for International Economics WP13-2, Peterson Institute for International Economics.
  4. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.

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