Accounting for reserves

Tamim Bayoumi and Christian Saborowski

Journal of International Money and Finance, 2014, vol. 41, issue C, 1-29

Abstract: Views on the effectiveness of sterilized reserve intervention vary. Sterilized intervention is generally seen as ineffective in advanced countries while persistent intervention by some emerging markets is often cited as contributing to undervalued exchange rates and current account surpluses. This paper argues that capital controls reconcile these views. We find strong and highly robust evidence that sterilized intervention is fully offset by outflows of private money in countries without controls, while controls partially block this offset. For a country with extensive capital controls, every dollar in additional reserves increases the current account by some 50–100 cents. This is mainly offset by an opposite adjustment in the current account of the United States—the dominant reserve currency issuer with the deepest and most liquid bond markets—with a smaller diversion to emerging markets.

Keywords: Reserve accumulation; Intervention; Global imbalances (search for similar items in EconPapers)
JEL-codes: E5 F30 F31 F32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (19)

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Working Paper: Accounting for Reserves (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:41:y:2014:i:c:p:1-29

DOI: 10.1016/j.jimonfin.2013.10.001

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