Real Exchange Rate and International Reserves in an Era of Growing Financial and Trade Integration

53 Pages Posted: 14 Oct 2008

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Daniel Riera-Crichton

University of California, Santa Cruz - Department of Economics

Date Written: February 1, 2007

Abstract

This paper evaluates the impact of international reserves, terms of trade shocks and capital flows on the real exchange rate (REER). We observe that international reserves cushions the impact of TOT shocks on the REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of IR in developing countries. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER.

Keywords: Real exchange rate, Terms of trade, International reserves, volatility, shock absorber

JEL Classification: F15, F21, F32, F36

Suggested Citation

Aizenman, Joshua and Riera-Crichton, Daniel, Real Exchange Rate and International Reserves in an Era of Growing Financial and Trade Integration (February 1, 2007). Available at SSRN: https://ssrn.com/abstract=1283960 or http://dx.doi.org/10.2139/ssrn.1283960

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Daniel Riera-Crichton

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States