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

Author

Listed:
  • Joshua Aizenman
  • Sy-Hoa Ho
  • Luu Duc Toan Huynh
  • Jamel Saadaoui
  • Gazi Salah Uddin

Abstract

The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.

Suggested Citation

  • Joshua Aizenman & Sy-Hoa Ho & Luu Duc Toan Huynh & Jamel Saadaoui & Gazi Salah Uddin, 2023. "Real Exchange Rate and International Reserves in the Era of Financial Integration," NBER Working Papers 30891, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30891
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    Cited by:

    1. Nikolaos Giannakis & Periklis Gogas & Theophilos Papadimitriou & Jamel Saadaoui & Emmanouil Sofianos, 2025. "Do International Reserve Holdings Still Predict Economic Crises? Insights from Recent Machine Learning Techniques," Working Papers 2025.6, International Network for Economic Research - INFER.
    2. Saadaoui, Jamel, 2024. "Financial development, international reserves, and real exchange rate dynamics: Insights from the Europe and Central Asia region," Finance Research Letters, Elsevier, vol. 70(C).
    3. Ahmed, Rashad & Aizenman, Joshua & Saadaoui, Jamel & Uddin, Gazi Salah, 2023. "On the effectiveness of foreign exchange reserves during the 2021-22 U.S. monetary tightening cycle," Economics Letters, Elsevier, vol. 233(C).
    4. Aizenman, Joshua & Park, Donghyun & Qureshi, Irfan A. & Saadaoui, Jamel & Salah Uddin, Gazi, 2024. "The performance of emerging markets during the Fed’s easing and tightening cycles: A cross-country resilience analysis," Journal of International Money and Finance, Elsevier, vol. 148(C).
    5. Jorge Carrera & Gabriel Montes-Rojas & Mariquena Solla & Fernando Toledo, 2023. "Does Income Inequality Affect Capital Flows? Evidence from Emerging Markets and Developing Economies," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2023-86, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    6. Linda Glawe & Jamel Saadaoui & Can Xu, 2025. "Nonlinearities in the Inflation-Growth Relationship and the Role of Uncertainty: Evidence from China’s Provinces," Working Papers 2025.4, International Network for Economic Research - INFER.
    7. Serhat Yüksel & Serkan Eti & Hasan Dinçer & Yaşar Gökalp & Gabriela Oana Olaru & Nihal Kalaycı Oflaz, 2025. "Innovative financial solutions for sustainable investments using artificial intelligence-based hybrid fuzzy decision-making approach in carbon capture technologies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 11(1), pages 1-30, December.
    8. Coulibaly, Issiaka & Gnimassoun, Blaise & Mighri, Hamza & Saadaoui, Jamel, 2024. "International reserves, currency depreciation and public debt: New evidence of buffer effects in Africa," Emerging Markets Review, Elsevier, vol. 60(C).
    9. Dorcas Jepchirchir Sang & Simeon Nganai & Isaacs Kemboi, 2025. "Selected Monetary and Fiscal Factors and Exchange Rate Volatility: An Empirical Analysis of Money Supply, Inflation, Foreign Reserves and External Debt in East Africa Partner States," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 12(7), pages 587-599, July.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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