On the effectiveness of foreign exchange reserves during the 2021-22 U.S. monetary tightening cycle

Rashad Ahmed, Joshua Aizenman, Jamel Saadaoui and Gazi Uddin

Economics Letters, 2023, vol. 233, issue C

Abstract: This paper examines whether the size of foreign exchange (FX) reserves explains cross-country differences in foreign currency depreciation realized over the 2021-22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Across a broad sample of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation against the US dollar and this buffer effect was larger among less financially developed economies. Effects were more pronounced for large-reserve countries that sold reserves to intervene than for large-reserve countries that did not intervene, supporting the presence of both balance sheet and intervention channels. Higher ex-ante policy rates were also associated with less depreciation especially among financially open economies. An analysis of daily currency movements following the June 2021 FOMC meeting corroborates the main results. These findings suggest that FX reserves may promote monetary policy independence in the presence of global spillovers.

Keywords: International reserves; Trilemma; Global financial cycle; Currency risk; Spillovers (search for similar items in EconPapers)
JEL-codes: F3 F31 F32 F36 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: On the Effectiveness of Foreign Exchange Reserves During the 2021-22 U.S. Monetary Tightening Cycle (2023)
Working Paper: On the Effectiveness of Foreign Exchange Reserves during the 2021-22 U.S. Monetary Tightening Cycle (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:233:y:2023:i:c:s0165176523003920

DOI: 10.1016/j.econlet.2023.111367

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