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Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?

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  • M S Mohanty
  • Philip Turner

Abstract

This paper discusses some of the domestic implications of the recent large-scale use of foreign exchange intervention by emerging market economies to resist currency appreciation. Over the past five years, many countries have adopted an accommodating monetary policy while intervening. Despite the prolonged period of low interest rates that resulted, various other forces have kept inflation under control and so eased one policy dilemma for central banks. Nevertheless, large and prolonged reserve accumulation can still create risks other than near-term inflation. These include=high intervention costs; monetary imbalances; overheated credit and asset markets; and very liquid and perhaps distorted banking systems.

Suggested Citation

  • M S Mohanty & Philip Turner, 2006. "Foreign exchange reserve accumulation in emerging markets: what are the domestic implications?," BIS Quarterly Review, Bank for International Settlements, September.
  • Handle: RePEc:bis:bisqtr:0609f
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    References listed on IDEAS

    as
    1. Philip D Wooldridge, 2006. "The changing composition of official reserves," BIS Quarterly Review, Bank for International Settlements, September.
    2. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    3. Reinhart, Carmen M. & Dunaway, Steven, "undated". "Dealing with Capital Inflows Are There Any Lessons?," WIDER Working Papers 295321, United Nations University, World Institute for Development Economic Research (UNU-WIDER).
    4. M S Mohanty & Philip Turner, 2005. "Intervention: what are the domestic consequences?," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 56-81, Bank for International Settlements.
    5. Robert N McCauley, 2003. "Unifying government bond markets in East Asia," BIS Quarterly Review, Bank for International Settlements, December.
    6. Mr. Mohsin S. Khan & Ms. Carmen Reinhart, 1995. "Capital Flows in the APEC Region," IMF Occasional Papers 1995/015, International Monetary Fund.
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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