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The cost of holding foreign exchange reserves

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  • Eduardo Levy Yeyati
  • Juan Francisco Gómez

Abstract

Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.

Suggested Citation

  • Eduardo Levy Yeyati & Juan Francisco Gómez, 2019. "The cost of holding foreign exchange reserves," School of Government Working Papers 201901, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpgobi:201901
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    Cited by:

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    2. Yeonjeong Lee & Seong-Min Yoon, 2020. "Relationship between International Reserves and FX Rate Movements," Sustainability, MDPI, vol. 12(17), pages 1-24, August.
    3. Federico Sturzenegger, 2020. "How should Central Banks accumulate reserves?," Working Papers 139, Universidad de San Andres, Departamento de Economia, revised May 2020.

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    More about this item

    Keywords

    International reserves; exchange rate policy; capital flows; financial crisis;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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