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FX reserve management: trends and challenges

  • Bank for International Settlements
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    The increasing size and concentration of official foreign exchange reserves after years of continued expansion, especially since the Asian crisis, have led to renewed interest in the way reserve management decisions are taken and in their possible impact on financial markets. Reserve management practices have evolved substantially over the past decade or so, reflecting changes in both the economic and the broader institutional environment. While some of these changes have been remarked upon, others have attracted less attention. This paper documents some of the main changes in foreign exchange reserve management practices, considers the main drivers behind them, and explores some of the challenges ahead. We focus, in particular, on those challenges that could have a more significant impact on financial markets. These include the choice of an appropriate balance between risk and return, of the numeraire currency and of the degree of public disclosure, from which some conclusions are drawn concerning the future of the US dollar as a reserve currency and volatility in financial markets. The discussion relies extensively on a survey of central banks and monetary authorities representing in total about 80% of global foreign exchange reserves at end-2006.

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    This book is provided by Bank for International Settlements in its series BIS Papers with number 40 and published in 2008.
    ISBN: 92-9131-764-0
    Handle: RePEc:bis:bisbps:40
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    1. Michael P. Dooley & J. Saul Lizondo & Donald J. Mathieson, 1989. "The Currency Composition of Foreign Exchange Reserves," IMF Staff Papers, Palgrave Macmillan, vol. 36(2), pages 385-434, June.
    2. Edwin M. Truman, 2007. "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability," Policy Briefs PB07-6, Peterson Institute for International Economics.
    3. Francis E. Warnock & Veronica C. Warnock, 2005. "International Capital Flows and U.S. Interest Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp103, IIIS.
    4. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
    5. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
    6. Eijffinger, Sylvester C W & Geraats, Petra M, 2002. "How Transparent are Central Banks?," CEPR Discussion Papers 3188, C.E.P.R. Discussion Papers.
    7. Elias Papaioannou & Richard Portes & Gregorios Siourounis, 2006. "Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar," NBER Working Papers 12333, National Bureau of Economic Research, Inc.
    8. Gabriele Galati & Philip Wooldridge, 2009. "The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-23.
    9. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    10. Peter Isard, 2006. "Uncovered Interest Parity," IMF Working Papers 06/96, International Monetary Fund.
    11. Eichengreen, Barry, 1998. "The Euro as a Reserve Currency," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 483-506, December.
    12. Flandreau, Marc & Jobst, Clemens, 2006. "The Empirics of International Currencies: Historical Evidence," CEPR Discussion Papers 5529, C.E.P.R. Discussion Papers.
    13. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Working Papers 2005-030, Federal Reserve Bank of St. Louis.
    14. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
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