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Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration

Author Info

  • Joshua Aizenman
  • Daniel Riera-Crichton

Abstract

This paper evaluates the impact of international reserves, terms of trade shocks and capital flows on the real exchange rate (REER). We observe that international reserves cushions the impact of TOT shocks on the REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of IR in developing countries. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER.

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File URL: http://www.nber.org/papers/w12363.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12363.

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Date of creation: Jul 2006
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Publication status: published as Aizenman, Joshua and Daniel Riera-Crichton. "Real exchange rate and international reserves in the era of growing financial and trade integration." Review of Economics and Statistics 90, 4 (2008): 812-815.
Handle: RePEc:nbr:nberwo:12363
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Keywords:

Find related papers by JEL classification:

  • F15 - International Economics - - Trade - - - Economic Integration
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
  • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
  • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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  1. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," CEPR Discussion Papers 5629, C.E.P.R. Discussion Papers.
  2. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
  3. Caballero, Ricardo, 2003. "On the international financial architecture: Insuring emerging markets," Journal of Financial Transformation, Capco Institute, vol. 7, pages 8-12.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications (Working Papers) 6516, Inter-American Development Bank.
  5. Menzie Chinn, 2006. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," Open Economies Review, Springer, vol. 17(1), pages 115-143, January.
  6. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-30, August.
  7. Prema-chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," Departmental Working Papers 2003-02, The Australian National University, Arndt-Corden Department of Economics.
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