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Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration

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  • Joshua Aizenman
  • Daniel Riera-Crichton

Abstract

This paper evaluates the impact of international reserves, terms of trade shocks and capital flows on the real exchange rate (REER). We observe that international reserves cushions the impact of TOT shocks on the REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of IR in developing countries. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12363.

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Date of creation: Jul 2006
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Publication status: published as Aizenman, Joshua and Daniel Riera-Crichton. "Real exchange rate and international reserves in the era of growing financial and trade integration." Review of Economics and Statistics 90, 4 (2008): 812-815.
Handle: RePEc:nbr:nberwo:12363

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  1. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  2. Hau, Harald, 2000. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2356, C.E.P.R. Discussion Papers.
  3. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications 6516, Inter-American Development Bank.
  4. Prema-Chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 26(4), pages 613-637, 04.
  5. Aghion, Philippe & Bacchetta, Philippe & Ranciere, Romain & Rogoff, Kenneth S., 2009. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Scholarly Articles 12490419, Harvard University Department of Economics.
  6. Philippe Aghion & Philippe Baccheta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 06-16, Swiss Finance Institute.
  7. Ricardo J. Caballero, 2003. "On the International Financial Architecture: Insuring Emerging Markets," NBER Working Papers 9570, National Bureau of Economic Research, Inc.
  8. Menzie Chinn, 2006. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," Open Economies Review, Springer, Springer, vol. 17(1), pages 115-143, January.
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