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Accounting for Reserves

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Listed:
  • Tamim Bayoumi
  • Christian Saborowski

Abstract

Views on the effectiveness of sterilized reserve intervention vary. Sterilized intervention is generally seen as ineffective in advanced countries while persistent intervention by some emerging markets is often cited as contributing to undervalued exchange rates and current account surpluses. This paper argues that capital controls reconcile these views. We find strong and highly robust evidence that sterilized intervention is fully offset by outflows of private money in countries without controls, while controls partially block this offset. For a country with extensive capital controls, every dollar in additional reserves increases the current account by some 50 cents. This is mainly offset by an opposite adjustment in the current account of the United States—the dominant reserve currency issuer with the deepest and most liquid bond markets—with a smaller diversion to other emerging markets.

Suggested Citation

  • Tamim Bayoumi & Christian Saborowski, 2012. "Accounting for Reserves," IMF Working Papers 12/302, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/302
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andrew J. Filardo & Pierre L. Siklos, 2016. "Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 364-381, February.
    2. repec:scn:000ven:119338 is not listed on IDEAS
    3. Michael Bordo & Robert N McCauley, 2017. "Triffin: dilemma or myth?," BIS Working Papers 684, Bank for International Settlements.
    4. Bayoumi, Tamim & Gagnon, Joseph & Saborowski, Christian, 2015. "Official financial flows, capital mobility, and global imbalances," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 146-174.
    5. Steiner, Andreas, 2014. "Current account balance and dollar standard: Exploring the linkages," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 65-94.
    6. Joseph E. Gagnon & Tamim Bayoumi & Juan M. Londono & Christian Saborowski & Horacio Sapriza, 2017. "Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies," Open Economies Review, Springer, vol. 28(2), pages 191-232, April.
    7. Reinhardt, Dennis & Ricci, Luca Antonio & Tressel, Thierry, 2013. "International capital flows and development: Financial openness matters," Journal of International Economics, Elsevier, vol. 91(2), pages 235-251.
    8. repec:bla:buecrs:v:68:y:2016:i:s1:p:146-170 is not listed on IDEAS
    9. Joseph E. Gagnon & Tamim Bayoumi & Juan M. Londono & Christian Saborowski & Horacio Sapriza, 2017. "Unconventional Monetary and Exchange Rate Policies," International Finance Discussion Papers 1194, Board of Governors of the Federal Reserve System (U.S.).
    10. Joseph E. Gagnon, 2013. "The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances," Working Paper Series WP13-2, Peterson Institute for International Economics.
    11. Habib, Maurizio Michael & Mileva, Elitza & Stracca, Livio, 2017. "The real exchange rate and economic growth: Revisiting the case using external instruments," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 386-398.
    12. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.
    13. repec:wsi:qjfxxx:v:04:y:2014:i:01:n:s2010139214500025 is not listed on IDEAS
    14. Tamim Bayoumi & Franziska L Ohnsorge, 2013. "Do Inflows or Outflows Dominate? Global Implications of Capital Account Liberalization in China," IMF Working Papers 13/189, International Monetary Fund.
    15. Andrea Fracasso, 2015. "Economic Rebalancing and Growth: the Japanese experience and China’s prospects," DEM Discussion Papers 2015/07, Department of Economics and Management.
    16. Santiago García-Verdú & Manuel Ramos-Francia, 2014. "Interventions and Expected Exchange Rates in Emerging Market Economies," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-34.

    More about this item

    Keywords

    Emerging markets; Developed countries; Capital controls; Intervention; Foreign exchange; Global imbalances; Reserves; Reserves accumulation; Reserve accumulation; current account; capital account; current accounts; capital account liberalization; General;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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