THE SIZE OF FOREIGN EXCHANGE RESERVES AND LOCAL CURRENCY INTERNATIONALIZATION: CROSS-COUNTRY EVIDENCE

Zhiwen Zhang ()
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Zhiwen Zhang: School of Global Studies, Sun Yat-sen University, Institute of Advanced International Studies, Sun Yat-sen University, Guangzhou, China

The Singapore Economic Review (SER), 2016, vol. 61, issue 05, 1-28

Abstract: This paper produces the first cross-country evidence on the relationship between the size of foreign exchange reserves and local currency internationalization using a sample of Switzerland, Japan and the UK. It finds that a high ratio of foreign exchange reserves to international reserves has a significant, but negative, impact on local currency internationalization during the period 1976–2009. After controlling for interest rate differential, different indicators for long-run depreciation and volatility of exchange rates, as well as the once-in-a-century global financial crisis of 2007–2009, the above conclusion still holds. Additionally, these results are robust to different methods (Pooled OLS and Pooled IV/2SLS) and measures of the scale of foreign exchange reserves. This study is informative for any policy decisions and will provide a strategic reference for the Chinese government as it optimizes the composition of its international reserves, promotes the process of renminbi (RMB) internationalization and becomes a major power through financial development.

Keywords: Foreign exchange reserves; local currency internationalization; cross-country evidence; RMB internationalization (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S0217590815500812

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