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Measurement and Inference in International Reserve Diversification

Author

Listed:
  • Anna Wong

    (University of Chicago)

Abstract

This paper analyzes international reserve diversification by examining changes in quantity shares of currencies held in foreign exchange reserves. It discusses alternative methodologies for constructing quantity shares and applies the preferred methodology to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund's Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings. What can one infer from available data about the diversification of foreign exchange reserves since 1999? The analysis suggests four conclusions: (1) The behavior of the quantity shares of the US dollar and the euro in total reserves is consistent with net stabilizing intervention; their quantity shares tend to rise when these currencies are declining and vice versa. (2) The principal driver of this stabilizing diversification over the period 1999Q1–2005Q4 is Japan. (3) The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. (4) The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. In summary, the aggregate data conceal much diversity in the practices of individual countries.

Suggested Citation

  • Anna Wong, 2007. "Measurement and Inference in International Reserve Diversification," Working Paper Series WP07-6, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp07-6
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    File URL: https://piie.com/publications/working-papers/measurement-and-inference-international-reserve-diversification
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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. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
    3. 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.
    4. Ewe-Ghee Lim, 2006. "The Euro’s Challenge to the Dollar; Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data," IMF Working Papers 06/153, International Monetary Fund.
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    Citations

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    Cited by:

    1. Philip R. Lane & Jay C. Shambaugh, 2010. "Financial Exchange Rates and International Currency Exposures," American Economic Review, American Economic Association, pages 518-540.
    2. Eichengreen, Barry & Livia, Chitu & Mehl, Arnaud, 2014. "Stability or upheaval? The currency composition of international reserves in the long run," Globalization and Monetary Policy Institute Working Paper 201, Federal Reserve Bank of Dallas.
    3. repec:eee:jimfin:v:74:y:2017:i:c:p:371-385 is not listed on IDEAS
    4. Beck, Roland & Rahbari, Ebrahim, 2011. "Optimal reserve composition in the presence of sudden stops," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1107-1127, October.
    5. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    6. Beck, Roland & Rahbari, Ebrahim, 2008. "Optimal reserve composition in the presence of sudden stops: the euro and the dollar as safe haven currencies," Working Paper Series 916, European Central Bank.

    More about this item

    Keywords

    Foreign Exchange Reserves; Central Banks; Methodology; Index Numbers; Aggregation;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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