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Foreign currency reserves: why we hold them influences how we fund them




This article reviews New Zealand’s approach to funding foreign currency reserves: a mix of holding foreign currency assets funded by outright purchases of foreign exchange, borrowing foreign currency long term to fund foreign currency assets, and swapping local currency assets for foreign currency assets for a long term. The use of borrowed and hedged reserves is unusual, but not unique, among floating exchange rate countries with liberalised financial markets. We consider the reasons for holding reserves, and the connection between these reasons and the costs and benefits of each of the funding options that New Zealand has chosen.

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  • Anella Munro & Michael Reddell, 2012. "Foreign currency reserves: why we hold them influences how we fund them," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 75, pages 35-45, September.
  • Handle: RePEc:nzb:nzbbul:sep2012:04

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    References listed on IDEAS

    1. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
    2. Michael Gordon, 2005. "Foreign reserves for crisis management," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, March.
    3. Anella Munro & Philip Wooldridge, 2011. "Motivations for swap-covered foreign currency borrowing," BIS Papers chapters,in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 19-56 Bank for International Settlements.
    4. Kelly Eckhold & Chris Hunt, 2005. "The Reserve Bank's new foreign exchange intervention policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 68, March.
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    1. Ding Ding & Werner Schule & Yan M Sun, 2014. "Cross-Country Experience in Reducing Net Foreign Liabilities; Lessons for New Zealand," IMF Working Papers 14/62, International Monetary Fund.

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