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Exchange-Rate Regimes and International Reserves

Listed author(s):
  • Changkyu Choi

    (Myongji University)

  • Seung-Gwan Baek

    (Hongik University)

In this paper, we use the new classification of exchange-rate arrangements developed by Reinhart and Rogoff (2004) to test whether reserve holdings decrease with increasing exchange-rate flexibility. Using pooled data for 127 countries over the period 1980-2000, we find several new results. First, the degree of exchange-rate flexibility has an inverted-U relationship with the country��s reserve holdings. Exchange-rate regimes with intermediate flexibility need more reserves than polar regimes (hard pegs and freely floating). Second, reserve holdings are smaller under hard pegs than under freely floating, implying that current large stockpiles of reserves in East Asian countries can be significantly reduced if they adopt a single currency. Finally, per capita GDP and reserve holdings have an inverted-U relationship, too, reflecting that their correlation would be negative for industrial countries, but positive for developing countries.

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File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20080630-24-1-04.pdf
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Article provided by Korean Economic Association in its journal Korean Economic Review.

Volume (Year): 24 (2008)
Issue (Month): ()
Pages: 105-129

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Handle: RePEc:kea:keappr:ker-20080630-24-1-04
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  1. Elbadawi, Ibrahim A, 1990. "The Sudan Demand for International Reserve: A Case of a Labour-Exporting Country," Economica, London School of Economics and Political Science, vol. 57(225), pages 73-89, February.
  2. Huang, Tai-Hsin & Shen, Chung-Hua, 1999. "Applying the seasonal error correction model to the demand for international reserves in Taiwan," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 107-131, January.
  3. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
  5. Ford, J L & Huang, Guobo, 1994. "The Demand for International Reserves in China: An ECM Model with Domestic Monetary Disequilibrium," Economica, London School of Economics and Political Science, vol. 61(243), pages 379-397, August.
  6. Philip Lane & Dominic Burke, 2001. "The Empirics of Foreign Reserves," Open Economies Review, Springer, vol. 12(4), pages 423-434, October.
  7. J. M. Landell-Mills, 1989. "The Demand for International Reserves and Their Opportunity Cost," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 708-732, September.
  8. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "Optimal international reserves and sovereign risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 345-362, November.
  9. Grimes, Arthur, 1993. "International Reserves under Floating Exchanges Rates: Two Paradoxes Explained," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 411-415, December.
  10. Edwards, Sebastian, 1983. "The Demand for International Reserves and Exchange Rate Adjustments: The Case of LDCs, 1964-1972," Economica, London School of Economics and Political Science, vol. 50(199), pages 269-280, August.
  11. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate of the Effect of Common Currencies on Trade and Income," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 437-466.
  12. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
  13. Tamim Bayoumi & Paolo Mauro, 2001. "The Suitability of ASEAN for a Regional Currency Arrangement," The World Economy, Wiley Blackwell, vol. 24(7), pages 933-954, July.
  14. Williamson, John, 1976. " Exchange-Rate Flexibility and Reserve Use," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 327-339.
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