Sustainable management of central banks’ foreign exchange (FX) reserves

Ingo Fender, Mike McMorrow and Omar Zulaica

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One key motivation is the need to mobilise funds for the large-scale public sector investment required to reach the goals of the Paris Agreement on climate change. This paper explores the role central banks’ foreign exchange (FX) reserves portfolios can play in this context. Central banks’ frameworks for managing FX reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Incorporating sustainability requires expanding this usual triad into a tetrad. This can be achieved either explicitly, by introducing new economic uses of reserves, or implicitly, by recognising the ways in which sustainability affects existing policy objectives – or through a combination of both approaches. Pursuing sustainability, however, may give rise to trade-offs over and above the usual tensions between liquidity and safety and return. This paper explores sustainability-enhanced reserve management in the context of these trade-offs and outlines 12 different channels (classified into four different types) that reserve managers can use to ‘green’ their operations. Each of these channels comes with its own advantages and limitations, so – given the constraints faced at the individual reserve manager’s level – choosing the right channels is key.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2022-07-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-env and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:115540

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