 Optimal reserve composition in the presence of sudden stopsRoland Beck and Ebrahim Rahbari Journal of International Money and Finance, 2011, vol. 30, issue 6, 1107-1127 Abstract: We analytically derive optimal central bank portfolios in a minimum variance framework with two assets and transaction demands caused by sudden stops in capital inflows. In this model, transaction demands become less important relative to traditional portfolio objectives as debt to reserve ratios decrease. We empirically estimate optimal dollar and euro shares for 23 emerging market countries and find that optimal reserve portfolios are dominated by anchor currencies and, at current debt-to-reserve ratios, introducing transaction demand has a relatively modest effect for most countries. We find that, in general, the dollar acts as a safe haven currency during sudden stops for country specific and global sudden stops, increasing the optimal share of dollar bonds in central bank portfolios. Correspondingly, our model predicts that dollar shares should decline as debt-to-reserve ratios fall, as observed in recent data. We also find that the denomination of foreign currency debt has little importance for optimal reserve portfolios. Keywords: Foreign; exchange; reserves; Currency; composition; Sudden; stops (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:6:p:1107-1127 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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