External debt currency denomination and the currency composition of foreign exchange reserves

Dong Lu, Xingwang Qian and Wenyu Zhu

Pacific-Basin Finance Journal, 2024, vol. 86, issue C

Abstract: This study examines the effect of external debt currency denomination on the currency composition of foreign exchange reserves (FXR) in 51 countries from 1999 to 2019. We employ a treatment effect model in which the central bank swap lines during the 2008 global financial crisis act as a plausibly exogenous shock. Our findings indicate that higher proportions of dollar-denominated external debt led central banks to hold more US dollar in their FXR. The responsiveness of this relation diminishes in the presence of capital controls. Furthermore, we provide a theoretical model to demonstrate that the buffer stock role of FXR is a viable channel through which US dollar-denominated debt influences central banks' dollar FXR holdings.

Keywords: Currency composition; Foreign exchange reserves; External debt; Buffer stock; Swap line (search for similar items in EconPapers)
JEL-codes: F31 F33 F34 F42 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:86:y:2024:i:c:s0927538x24001896

DOI: 10.1016/j.pacfin.2024.102438

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