Real exchange rate and international reserves in the era of financial integration

Joshua Aizenman, Sy-Hoa Ho, Luu Duc Toan Huynh, Jamel Saadaoui and Gazi Uddin

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

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. We find the buffer effect of international reserves is more pronounced in Europe and Central Asia above a threshold of 17% of international reserves over GDP. 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.

Keywords: Real exchange rate; International reserves; Financial institutions. (search for similar items in EconPapers)
JEL-codes: F15 F21 F32 F36 G20 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Real exchange rate and international reserves in the era of financial integration (2024)
Working Paper: Real exchange rate and international reserves in the era of financial integration (2023)
Working Paper: Real Exchange Rate and International Reserves in the Era of Financial Integration (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2023-07

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