FX Reserve Management: Trends and Challenges

36 Pages Posted: 1 Aug 2008

Date Written: May 2008

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.

JEL Classification: E58, F30, F31, G11, G15

Suggested Citation

Settlements, Bank for International, FX Reserve Management: Trends and Challenges (May 2008). BIS Paper No. 40, Available at SSRN: https://ssrn.com/abstract=1191122

Bank for International Settlements (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4051
Switzerland

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