The Case for an International Reserve Diversification Standard

46 Pages Posted: 17 May 2006

See all articles by Edwin M. Truman

Edwin M. Truman

Institute for International Economics (IIE)

Anna Wong

Institute for International Economics (IIE)

Date Written: May 2006

Abstract

Rumors about the actual or potential currency diversification of countries' foreign exchange holdings out of dollars are not a new phenomenon. This working paper argues that such concerns about reserve diversification are exaggerated. We present evidence that the extent of actual diversification has been modest to date. Nevertheless, the potential for reserve diversification adds volatility to foreign exchange markets and can catalyze abrupt exchange rate movements. We argue that policymakers acting in their own national interests can do something constructive to reduce the volatility introduced into foreign exchange and financial markets by rumors of large-scale international foreign exchange reserve diversification. We propose the voluntary adoption by major foreign exchange reserve holders in particular of an International Reserve Diversification Standard consisting of two elements: (1) routine disclosure of the currency composition of official foreign exchange holdings and (2) a commitment by each adherent to adjust gradually the actual currency composition of its reserves to any new benchmark for those holdings.

Keywords: Foreign Exchange Reserves, Central Banks, International Investment and Long-Term Capital Movements, International Monetary Arrangements and Institutions

JEL Classification: F31, E58, F21, F33

Suggested Citation

Truman, Edwin M. and Wong, Anna, The Case for an International Reserve Diversification Standard (May 2006). IIE Working Paper No. 06-2, Available at SSRN: https://ssrn.com/abstract=902034 or http://dx.doi.org/10.2139/ssrn.902034

Edwin M. Truman (Contact Author)

Institute for International Economics (IIE) ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Anna Wong

Institute for International Economics (IIE) ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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