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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. Joseph E. Gagnon, 2012. "Global Imbalances and Foreign Asset Expansion by Developing Economy Central Banks," Working Paper Series WP12-5, Peterson Institute for International Economics.
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  19. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2012. "Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy," NBER Working Papers 18431, National Bureau of Economic Research, Inc.
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