Too Big to Change: The Stabilizing Force of Reserve Currency Preferences in the International Monetary System

Alice Ouyang () and Jie Li ()

Emerging Markets Finance and Trade, 2013, vol. 49, issue 5, 120-133

Abstract: We empirically investigate whether reserve currency preferences have been a source of stability for the international monetary system. Our findings suggest that reserve-hoarding countries, especially the emerging/developing countries, tend to adopt a stabilizing diversification strategy in their reserve portfolio allocation, buying (selling) assets denominated in depreciated (appreciated) currency. The result is robust to both International Monetary Fund and Bank for International Settlements measures of quantity changes of reserve shares. The stabilizing diversification strategy reveals the fact that reserve-hoarding countries may fall into a "dollar trap," and escaping from it may cause more valuation loss of their existing reserve portfolios.

Keywords: active diversification; exchange rates; foreign reserves; portfolio strategy; stabilizing diversification (search for similar items in EconPapers)
Date: 2013
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