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Managing international reserves: how does diversification affect financial costs?


  • Srichander Ramaswamy


As reserve accumulation has gathered pace in recent years, and as foreign exchange (FX) reserve holdings have risen far above conventional measures of reserve adequacy, a vigorous debate has begun as to whether part of the reserves should be invested in riskier assets to reduce their financial costs. Estimates from hypothetical reserve portfolios of selected emerging market economies over the period 1999-2007 suggest that the reduction in financial costs from holding riskier assets would generally have been small relative to GDP. Accounting practices and profit distribution rules are likely to play an influential role in asset allocation decisions.

Suggested Citation

  • Srichander Ramaswamy, 2008. "Managing international reserves: how does diversification affect financial costs?," BIS Quarterly Review, Bank for International Settlements, June.
  • Handle: RePEc:bis:bisqtr:0806f

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    References listed on IDEAS

    1. Faisal Ahmed & Shengzu Wang & Isabelle Mateos y Lago & Samar Maziad & Stephanie Segal & Pascal Farahmand & Udaibir S Das, 2011. "Internationalization of Emerging Market Currencies; A Balance Between Risks and Rewards," IMF Staff Discussion Notes 11/17, International Monetary Fund.
    2. Dong He & Robert N. McCauley, 2010. "Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues," Working Papers 1002, Hong Kong Monetary Authority.
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    Cited by:

    1. Marie Brière & Valérie Mignon & Kim Oosterlinck & Ariane Szafarz, 2016. "Towards greater diversification in central bank reserves," Journal of Asset Management, Palgrave Macmillan, vol. 17(4), pages 295-312, July.
    2. Ghosh, Amit, 2016. "What drives gold demand in central bank's foreign exchange reserve portfolio?," Finance Research Letters, Elsevier, vol. 17(C), pages 146-150.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation


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