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Accounting for Reserves

  • Tamim Bayoumi
  • Christian Saborowski

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/302.

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Length: 37
Date of creation: 21 Dec 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/302
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  1. 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.
  2. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  3. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
  4. Christopher J. Neely, 2011. "A foreign exchange intervention in an era of restraint," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 303-324.
  5. Neely, Christopher J., 2008. "Central bank authorities' beliefs about foreign exchange intervention," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 1-25, February.
  6. Menzie D. Chinn & Barry Eichengreen & Hiro Ito, 2011. "A Forensic Analysis of Global Imbalances," NBER Working Papers 17513, National Bureau of Economic Research, Inc.
  7. Christopher J. Neely, 2011. "The great foreign exchange intervention of 2011," Economic Synopses, Federal Reserve Bank of St. Louis.
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