Currency Diversification of Reserves and Sovereign Debt for Small Open Economies

Indi Rajasingham

No 1991/109, IMF Working Papers from International Monetary Fund

Abstract: An approach for minimizing risk through diversification of foreign exchange reserves and sovereign borrowings is proposed for central banks of small open economies. This approach--developed in a simple 2-period, 3-country framework--differs from past work in that the elements of exchange and price risk associated with trade and payments are considered in the portfolio allocation problem. The analysis shows that the net level of reserves and the primary transactions balance affect the optimal portfolio leading to deviations from the optimal allocation prescribed by the classical portfolio model. In addition, this result has implications for the currency composition of exchange market intervention transactions.

Keywords: WP; foreign currency; central bank; rate of exchange; optimal portfolio; purchasing power; currency composition; allocation problem; currency allocation; currency diversification; allocation weight; currency denomination; composition of reserves variation; currency portfolio; unit of currency; intervention currency; Currencies; Exchange rates; Reserve positions; International reserves; Reserve currencies (search for similar items in EconPapers)
Pages: 48
Date: 1991-11-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1991/109

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