FX reserve management: trends and challenges

Claudio Borio, Gabriele Galati and Alexandra Heath

No 40 in BIS Papers from Bank for International Settlements

Abstract: The increasing size and concentration of official foreign exchange reserves after years of continued expansion, especially since the Asian crisis, have led to renewed interest in the way reserve management decisions are taken and in their possible impact on financial markets. Reserve management practices have evolved substantially over the past decade or so, reflecting changes in both the economic and the broader institutional environment. While some of these changes have been remarked upon, others have attracted less attention. This paper documents some of the main changes in foreign exchange reserve management practices, considers the main drivers behind them, and explores some of the challenges ahead. We focus, in particular, on those challenges that could have a more significant impact on financial markets. These include the choice of an appropriate balance between risk and return, of the numeraire currency and of the degree of public disclosure, from which some conclusions are drawn concerning the future of the US dollar as a reserve currency and volatility in financial markets. The discussion relies extensively on a survey of central banks and monetary authorities representing in total about 80% of global foreign exchange reserves at end-2006.

Date: 2008 Written 2008-05
ISBN: 92-9131-764-0
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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