Dynamics of the currency composition of central bank reserves

Deborah Gefang, Stephen Hall and George Tavlas
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Deborah Gefang: Department of Economics, Leicester University
Stephen Hall: Department of Economics, Leicester University, Bank of Greece, and University of St Andrews

No 369, Working Papers from Bank of Greece

Abstract: We examine how macroeconomic and geopolitical developments in the United States, the euro area, and China affect the currency composition of central banks’ foreign exchange reserves. Using an unbalanced panel of reserve shares for 53 countries over 1999–2023, we estimate a constrained system of equations that explicitly imposes the adding-up restriction on reserve shares. The results indicate substantial persistence in reserve holdings and significant cross-currency dependence, supporting a system-wide dynamics of reserve composition. In the country fixed-effects specification (1) issuer economic size, (2) uncertainty, (3) sanctions, (4) trade linkages, and (5) issuer credibility are significantly associated with reserve allocation across currencies. With the inclusion of year fixed effects, the persistence and cross-currency dependence remain, while trade linkages and sanctions emerge as the most important determinants of reserve composition. The results highlight the importance of accounting for the compositional nature and interdependence of reserve shares when examining the determinants of global reserve holdings.

Keywords: reserve currencies; U.S. dollar; determinants of international currencies; interdependence of currency composition (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Pages: 47
Date: 2026-09
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Working Paper: Dynamics of the Currency Composition of Central Bank Reserves (2026)
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