Showing papers on "Foreign-exchange reserves published in 2008"

The Drivers of Financial Globalization

Abstract: Over the past decade, emerging markets have accounted for a growing fraction of world GDP and international trade (reflecting fast growth in China and India, but also strong economic performance across the board). And the spec tacular increase in foreign exchange reserve holdings, the growing importance of sovereign wealth funds, and the pattern of global imbal ances more generally suggest that these coun tries are also playing a major role in financial globalization.

The impact of sovereign wealth funds on global financial markets

Abstract: This paper analyses the impact of sovereign wealth funds (SWFs) on global financial markets. It presents back-of-the-envelope calculations which simulate the potential impact of a transfer of traditional foreign exchange reserves to SWFs on global capital flows. If SWFs behave as CAPM-type investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their “bias” towards the major reserve currencies. As a result, more capital flows “downhill” from rich to less wealthy economies, in line with standard neoclassical predictions. More specifically, it is found that under the assumption of SWFs investing according to market capitalisation weights, the euro area and the United States could be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. It is also shown that these findings are sensitive to alternative assumptions for the portfolio objectives of SWFs. Finally, the paper discusses whether a change in net capital flows triggered by SWFs could have an impact on stock prices and bond yields. Based on an event study approach, no evidence can be found for a stock price impact of non-commercially motivated stock sales by Norway’s Government Pension Fund. JEL Classification: F30, F40, G15.

Why the Euro Will Rival the Dollar

Abstract: In the aftermath of World War II, the dollar emerged as the uncontested leaderamong international currencies, a development of historic significance. In 1899,the share of the pound in known foreign exchange holdings of officialinstitutionshadbeenmorethantwicethetotalofthenextnearestcompetitors,the franc and the mark, and much greater than the dollar.

Sterilization, Monetary Policy, and Global Financial Integration

Abstract: This paper investigates the changing pattern and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net balance of payments inflows, across countries and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.

The international role of the Euro

Abstract: Probably about a quarter of the world’s foreign exchange reserves are denominated in euros and the euro appears to have gained importance as a reserve currency in recent years. The dollar is the world’s pre-eminent anchor currency; the euro is a regionally important anchor currency. The euro has made limited progress as a vehicle currency; the dollar remains dominant. The dollar is the most important currency for invoicing, but the euro is now used in some transactions in some new EU member countries. The euro is likely to remain important as a reserve currency, but is unlikely to usurp the dollar’s role as an anchor currency, a vehicle currency or as a unit of account in the foreseeable future.

The impact of sovereign wealth funds on global financial markets

Abstract: If sovereign wealth funds act similarly to private investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their “bias” towards the major reserve currencies — the US dollar and the euro. As a result, more capital flows “downhill“ from rich to less wealthy economies. In this scenario, the euro area and the United States would be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. The potential implications of a rebalancing of international capital flows for stock prices, interest rates and exchange rates remain uncertain, however.

Sovereign Wealth and Pension Fund Issues

Abstract: Sovereign Wealth Funds (SWFs) are pools of assets owned and managed directly or indirectly by governments to achieve national objectives. These funds have raised concerns about: (i) financial stability, (ii) corporate governance and (iii) political interference and protectionism. At the same time governments have formed other large pools of capital to finance public pension systems, i.e. Public Pension Reserve Funds (PPRFs). SWFs are set up to diversify and improve the return on foreign exchange reserves or commodity revenue, and to shield the domestic economy from fluctuations in commodity prices. PPRFs are set up to contribute to financing pay-as-you-go pension plans. The total of SWF pools is estimated at around USD 2.6 trillion in 2006/7, and is getting bigger rapidly, owing to current exchange rate policies and oil prices. The total amount for PPRFs is even larger, around USD 4.4 trillion in 2006/7, if the US Trust Fund is included (USD 2.2 trillion if excluded). SWFs and PPRFs share some characteristics, hence give rise to similar concerns. However, their objectives, investment strategies, sources of funding and transparency requirements differ. There is concern about strategic and political objectives of SWFs, and their impact on exchange rates and asset prices. But SWFs also provide mechanisms for breaking up concentrations of portfolios that increase risk. Enhancing governance and transparency of SWFs is important, but such considerations have to be weighed against commercial objectives.

The euro may over the next 15 years surpass the dollar as leading international currency

Abstract: The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world's central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year's currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2025.

Sterilization, Monetary Policy, and Global Financial Integration

Abstract: This paper investigates the changing pattern and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net balance of payments inflows, across countries, and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.

Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Merchantilism

Abstract: Sovereign wealth funds (SWFs) have increased dramatically in size as a result of increased commodity prices and the increase in the foreign currency reserves of Asian trading countries. SWF assets now roughly equal those in hedge and private equity funds combined. This growth, and the shift of SWF investment strategy toward equities and increasingly high profile investments like capital infusions into U.S. financial institutions following the subprime mortgage problem, have generated calls for domestic and international regulation. The U.S. and other western economies already regulate the foreign acquisition of control of domestic corporations. However, acquisitions of significant but non-controlling positions are not regulated. The danger is that new regulation will compromise the beneficial recycling of trade surpluses accomplished by SWF investments. In this paper, we situate the controversy over SWF investments in the increasing global trend toward direct governmental involvement in corporate activity, a phenomenon we label the New Merchantilism. We explain why increased transparency of SWF investment portfolios and strategy, the most commonly advanced policy recommendation, does not respond to the chief concern that SWF investments have engendered. We offer a regulatory minimalist response to fears that SWFs will make portfolio investments for strategic rather than economic reasons. Under our proposal, voting rights of SWF equity investments in U.S. corporations would be suspended but reinstated on sale. Thus, SWFs would buy and sell fully voting rights, thereby assuring that the incentives to make non-strategic investments would be unaffected, while the capacity to exercise influence for strategic motives would be constrained. The paper concludes by assessing the extent to which even a regulatory minimalist response remains both over and under inclusive; however, the limited imprecision does not undermine the effectiveness of the response.

Sovereign wealth funds: stylized facts about their determinants and governance

Abstract: This paper presents statistical analysis supporting stylized facts about sovereign wealth funds (SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel exports and ongoing current account surpluses, and large hoarding of international reserves. It analyzes the degree to which measures of SWF governance and transparency compare with national norms of behavior. We provide evidence that many countries with SWFs are characterized by effective governance but weak democratic institutions, as compared to other nonindustrial countries. We also present a model with which we compare the optimal degree of diversification abroad by a central bank versus that of a sovereign wealth fund. We show that if the central bank manages its foreign assets with the objective of reducing the probability of sudden stops, it will place a high weight on the downside risk of holding risky assets abroad and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the degree of a country's transparency may affect the size of the foreign asset base entrusted to a wealth fund's management, and show that, for relatively low levels of public foreign assets, assigning portfolio management independence to the central bank may be advantageous. However, for a large enough foreign asset base, the opportunity cost associated with the limited portfolio diversification of the central bank induces authorities to establish a wealth fund in pursuit of higher returns.

The Rise and Fall of the Dollar, or When Did the Dollar Replace Sterling as the Leading International Currency?

Abstract: We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies.

Financial Stability, the Trilemma, and International Reserves

Abstract: The rapid growth of international reserves - a development concentrated in the emerging markets - remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.

The evolution of the East Asian currency baskets – still undisclosed and changing

Abstract: Both before and after the Asian crisis, the dollar has been the dominant anchor and reserve currency in East Asia. Due to underdeveloped capital markets and the limited international role of their domestic currencies, the East Asian countries (except Japan) are likely to continue to stabilize exchange rates and to accumulate international reserves. Yet expectations of further dollar depreciation may trigger a re-orientation of exchange rate policies based on basket strategies. Rolling econometric estimations of the basket structures in East Asia suggest growing weights for the Japanese yen in most East Asian currency baskets. The role of the euro as a reserve currency in East Asia remains uncertain.

Sovereign wealth funds: Stylized facts about their determinants and governance

Abstract: This paper presents statistical analysis supporting stylized facts about sovereign wealth funds (SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel exports and ongoing current account surpluses, and large hoarding of international reserves. It analyzes the degree to which measures of SWF governance and transparency compare with national norms of behavior. We provide evidence that many countries with SWFs are characterized by good governance, but weak democratic institutions, as compared to other nonindustrial countries. We also present a model with which we compare the optimal degree of diversification abroad by a central bank versus that of a sovereign wealth fund. We show that if the central bank manages its foreign assets with the objective of reducing the probability of sudden stops, it will place a high weight on the downside risk of holding risky assets abroad and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the degree of a country’s transparency may affect the size of the foreign asset base entrusted to a wealth fund’s management, and show that, for relatively low levels of public foreign assets, assigning portfolio management independence to the central bank may be desirable. However, for a large enough foreign asset base, the opportunity cost associated with the limited portfolio diversification of the central bank induces authorities to establish a wealth fund in pursuit of higher returns.

Russian economic report

Abstract: After a decade of high growth, the Russian economy is experiencing a slowdown in the wake of the global financial crisis. While Russia's strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than otherwise. Prudent fiscal management and substantial financial reserves have protected Russia from deeper consequences of this external shock. The government's policy response so far swift, comprehensive, and coordinated has helped limit the impact. Short-term macroeconomic stabilization has to be the immediate priority as the authorities continue to adjust their short-term policy responses to changing economic circumstances. But the crisis also presents an opportunity to address the medium to longer term challenges of competitiveness, economic diversification, and financial sector modernization which are necessary to boost growth and living standards. This would ensure that Russia emerges from this global crisis with a stronger basis for dynamic, productivity-led growth and is better placed to take advantage of global integration. In the first six months of 2008, real gross domestic product (GDP) growth in Russia continued at a brisk pace of about 8 percent, reflecting a booming economy and strong macroeconomic fundamentals. This growth exceeds the long-term potential of the economy (estimated in the 6-7 percent range), with clear signs of overheating. An upturn in inflation, a decline in unemployment, a rise in capital utilization, and real wages significantly outpacing productivity growth all indicated an overheating economy against the backdrop of binding supply (infrastructure) constraints.

The international role of the euro: A status report

Abstract: We survey the evidence on the international role of the euro a decade after its introduction In the early nineties during the initial stages of Economic and Monetary Union, sceptics raised concerns that the single currency would lead to political disintegration and economic divergence In contrast, some argued that the euro could become a major international currency within a relatively short time In fact, the international importance of the single European currency is rising incrementally among a number of dimensions, and a ‘middle-euro' scenario is emerging from the ‘quasi-status-quo' The share of the euro in foreign exchange reserves is rising, as is its usage in international trade An increasing number of countries use the euro to anchor their currencies and issue their debt The current global economic configuration of rising US inflation, a depreciating dollar, and the American trade and fiscal deficits reinforce the middle-euro scenario, in which the dollar and the euro share central roles in the international markets Yet in the absence of a powerful shock, the ongoing adjustment is likely to occur gradually, rather than abruptly, and only if European policy makers continue financial market reforms and the European Central Bank maintains low inflation expectations

FX reserve management: trends and challenges

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.

Navigating the Trilemma: Capital Flows and Monetary Policy in China

Abstract: In recent years China has faced an increasing trilemmaiXhow to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth lead to less inflation pressure even with a substantial buildup in international reserves.

Enhancing the role of regional development banks

Abstract: There are a number of important reasons why lending by regional or sub-regional development banks can and should play an important and valuable complementary role in the international development architecture. We look at the specific strengths of multilateral, regional and sub-regional development banks and drawing on the successful experience of the European Investment Bank and the Andean Development Corporation conclude that the time is now for creating new regional development banks and expanding existing ones. Creating new institutions or expanding existing ones will have very clear benefits, as for instance providing regional public goods which are currently undersupplied, such as regional infrastructure. Very large pools of savings and foreign exchange reserves originate in developing countries these days and therefore the potential for a significant expansion of regional or sub-regional development banks, with only or mainly developing country members has grown significantly. At the same time, it may be desirable to create new regional development banks where gaps exist, however too much duplication of services is not desirable.

Costs and benefits of running an international currency

Abstract: This report discusses the cost and benefits of running an international currency. It starts by discussing the effect of the euro's internationalization on financial markets, and presents data on the impact of the single currency on private credit. It considers recent work on the effect of the euro on financial integration and the implications of the euro's rising internationalization on the liquidity premium. Then it turns to the vehicle currency role of the euro and presents some results using new data from the latest BIS Triennial Survey on the foreign exchange market. Concerning the direct benefits of running an international currency, the report first offers estimates on the likely gains from international seigniorage and discuss work on the effects of the internationalization of the euro on the terms of trade and invoicing patterns in international trade. The implications of the international role of the euro for portfolio returns and the so-called “exorbitant privilege” are analysed in detail. The effects of the single currency on exchange rate volatility are also considered. It summarizes recent research on the impact of the euro on global bond and equity and analyzes the potential implications of the euro's international status for central banks' reserve holdings. Finally, it turns to the effects of the euro on the stability of domestic money demand and the problems posed for monetary policy, and the implications for international financial stability.

The management of China's huge foreign reserve and its currency composition

Abstract: In view of the current situation of China's huge foreign reserves, this paper puts forward the concepts of foreign reserve management - regular reserve management which focuses on liquidity management, and excess reserve management focusing on security and return The scale and the currency composition of regular reserve management can be determined by the factors of usage, while the currency composition of excess management can refer to that of the Special Drawing Right issued by the IMF

Issues in Central Bank Finance and Independence

Abstract: Conventional economic policy models focus only on selected elements of the central bank balance sheet, in particular monetary liabilities and sometimes foreign reserves. The canonical model of an "independent" central bank assumes that it chooses money (or an interest rate), unconstrained by a need to generate seignorage for itself or government. While a long line of literature has emphasized the dangers of fiscal dominance influencing the conduct of monetary policy the idea that an independent central bank could be constrained in achieving its policy objectives by its own balance sheet situation is a relatively novel idea considered in this paper. If one accepts this potential constraint as a valid concern, the financial strength of the central bank as a stand alone entity becomes highly relevant for ascertaining monetary policy credibility. We consider several strands of evidence that clearly indicate fiscal backing for central banks cannot be assumed and hence financial independence is relevant to operational independence. First we examine 135 central bank laws to illustrate the variety of legal approaches adopted with respect to central bank financial independence. Second, we examine the same data set with regard to central bank recapitalization provisions to show that even in cases where the treasury is nominally responsible for maintaining the central bank financially strong, it may do so in purely a cosmetic fashion. Third, we show that, in actual practice, treasuries have frequently not provided central banks with genuine financial support on a timely basis leaving them excessively reliant on seignorage to finance their operations and/or forcing them to abandon policy objectives.

Mechanisms of Resource Curse, Economic Policy and Growth

Abstract: This paper analyzes economic policies in resource rich countries and various mechanisms of resource curse leading to a potentially inefficient use of resources. Arguments are provided in favor of "conditional resource curse" hypothesis: resource abundance hampers growth if institutions of a country are weak. We study the impact of the resource abundance on budget deficit and inflation, foreign exchange reserves and real exchange rate, as well as policies of maintaining low domestic fuel and energy prices. We show that lower domestic fuel prices, that are typical for resource rich countries, have a positive effect on investment in R&D and fixed capital stock, and on long term growth, even though they are associated with losses resulting from higher energy intensity. However, in resource rich countries real exchange rate is generally higher than in other countries. Besides, resource abundance leads to corruption of institutions, especially if these institutions were not strong in the beginning of the period. While there is no solid evidence that, on average, resource abundant countries grow more slowly than the others, there is evidence that they use resources less efficiently, if their institutions are weak.

The Costs and Implications of PBC Sterilization

Abstract: Since China revalued its currency against the U.S. dollar by 2.1 percent in July 2005, from RMB 8.27 per US$ to RMB 8.11, the RMB has appreciated by a further 14 per cent percent to about RMB 6.97 per US$ (as of May 2008). On a trade-weighted basis, however, the currency has appreciated less than half this amount. Using J.E Morgan's trade-weighted index (broad basis) for the RMB, the currency appreciated just 6.1 percent in nominal terms between August 2005 and May 2008. Although the currency has been very gradually appreciating, the flexibility promised by China's leaders has been more illusory than real, and, more importantly, the underlying international payment imbalances have continued to widen both in absolute terms and as a fraction of GDP. In this article, I set out the magnitude of the problem of China's international payment imbalances, summarize the techniques used by the People's Bank of China to sterilize China's overall balance of payments surplus, and assess the costs and benefits of the PBC's sterilization strategy--both from a theoretical perspective and in the light of the experience of other East Asian currencies that have witnessed large-scale sterilization operations in the past. I also consider whether, for the purpose of ensuring satisfactory monetary arrangements in the 21st century, it is appropriate for a country of the size and stature of China to delay adjustment by means of large-scale sterilization. China's International Payments Imbalance In the period prior to 2002, there were few presumptions that China's currency would appreciate. There had been a long history of devaluations between 1960 and 1994. However, following the devaluation of 1994 and the subsequent monetary reforms the external value of the currency was held stable against the US$, notably throughout the Asian financial crisis of 1997-98. Nevertheless, the NDF (non-deliverable forward) value of China's currency traded at a persistent discount to the spot value of the currency (that is, weaker than the spot rate of around 8.27 per US$) until December 2002 when it moved to a premium for the first time (Figure 1). In the same year, the errors and omissions item in China's balance of payments shifted from negative to positive, suggesting a change from unreported outflows to unreported inflows. In 2003 and 2004 both the current account and the capital account showed marked increases in the size of their surpluses. [FIGURE 1 OMITTED] Since the revaluation of July 2005, and despite the gradual subsequent appreciation of the RMB against the U.S. dollar and other currencies, the low level of the Chinese currency is causing China to run increasingly large overall (current plus private sector capital account) surpluses in its balance of payments. The simplest measure of that overall (current and capital) surplus is the increase in China's foreign exchange reserves. (1) In 2006, the overall surplus was $246 billion or 9.1 percent of GDP, while the current account surplus was $249 billion or 9.2 percent of GDP (Table 1). In 2007, the current account surplus increased to $371.8 billion or 11.1 percent of GDR Similarly, the overall surplus in 2007 was $461.7 billion, or 13.8 percent of GDP. By any standard, these imbalances are of a very substantial magnitude, and will have large consequences for both China's trading partners as well as for China itself. PBC's Sterilization Techniques The overall surpluses in the balance of payments require the PBC, China's central bank, to intervene almost daily and buy any excess foreign currency on the Shanghai foreign exchange market in order to hold down the value of the RMB. Based on 250 trading days per year, the PBC's foreign exchange purchases exceeded $1.8 billion per day in 2007. In making these purchases, the PBC typically credits the reserve accounts of mainland banks with an equivalent amount of RMB, which in the normal course of events would cause China's money supply to accelerate (as in 2002-03), and this in turn would normally lead to inflation. …

Spinning out of control, Iceland in crisis

Abstract: Within few days in October 2008 some 85% of the Icelandic bank-sector collapsed, as did the Icelandic krona. Many non-financial firms declared bankruptcy or decimated their workforce. Inflation skyrocketed as did unemployment, the other ingredient in the misery index. This paper records how well-intended policies aimed at making life easier for house-owners, people living in de-populating areas, and taxpayers turned into misfortune. The mixture of lax fiscal policy, tight monetary policy, inflation targeting, and running the smallest floating currency in the world with inadequate foreign reserves proved to be dangerous.

Currency Boards in Retrospect and Prospect

Abstract: Currency boards, more so than other exchange rate regimes, have come in and out of fashion. Defined by a fixed exchange rate with full convertibility, central bank liabilities backed with foreign exchange reserves, and a high cost of exiting the regime, currency boards were common in colonial times--until most were cast off as countries gained independence after World War II. In the 1990s, currency boards enjoyed a revival as the cornerstone of various macroeconomic stabilization programs--including many in central and eastern European transition economies--only to fall into disfavor again with the collapse of the Argentine regime in 2002. The authors of Currency Boards in Retrospect and Prospect take a balanced look at the effects of currency board regimes on inflation, output growth, and macroeconomic performance more generally. Drawing on historical experience, economic theory, cross-country empirical analysis, and case studies of currency boards in Argentina, Estonia, Lithuania, Bulgaria, and Bosnia and Herzegovina, the authors conclude that currency boards deliver significant reductions in inflation compared to other regimes and do not seem to result in slower growth or a markedly higher vulnerability to crisis. Holger C. Wolf is Associate Professor at the BMW Center for German and European Studies at Georgetown University. Atish R. Ghosh is Chief of the Policy Review Division of the Policy Development and Review Department of the International Monetary Fund. Helge Berger is Professor and Chair of Monetary Economics at Free University Berlin and coeditor of Managing EU Enlargement (MIT Press, 2004). Anne-Marie Gulde is Assistant Director of the Policy Wing of the African Department at the International Monetary Fund. Ghosh, Gulde, and Wolf are the authors of Exchange Rate Regimes: Choice and Consequences (MIT Press, 2003).

FX reserve management: elements of a framework

Abstract: In recent years, issues related to the management of foreign exchange reserves have gained prominence, and reserve management practices have evolved rapidly. Against this background, the Monetary and Economic Department of the Bank for International Settlements organised an ad hoc meeting of senior central bankers from both industrial and emerging market countries responsible for the management of reserves, which took place on 1-2 March 2007. The meeting covered key issues in foreign exchange reserve management, including the broad framework in which it is conducted, asset allocation at the strategic, tactical and portfolio management levels, risk measurement and management, organisational structures and disclosure. This paper was prepared as background and provides a general framework to help organise the various issues that arise in the context of FX reserve management.