Real Exchange Rate and International Reserves in an Era of Growing Financial and Trade Integration

Joshua Aizenman and Daniel Riera-Crichton

The Review of Economics and Statistics, 2008, vol. 90, issue 4, 812-815

Abstract: This paper evaluates the impact of international reserves, terms-of-trade shocks, and capital flows on the real exchange rate (REER). We observe that international reserves cushion the impact of terms-of-trade shocks on REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of international reserves in developing countries. Developing countries' REERs seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2008
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Working Paper: Real exchange rate and international reserves in an era of growing financial and trade integration* (2007)
Working Paper: Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration (2006)
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