How Central Banks Prepare for Financial Crises - An Empirical Analysis of the Effects of Crises and Globalization on International Reserve Holdings

32 Pages Posted: 6 Aug 2009

See all articles by Andreas Steiner

Andreas Steiner

University of Osnabrueck, Institute of Empirical Economic Research

Date Written: May 2009

Abstract

Central banks’ international reserve holdings have increased significantly in the recent past. While traditional models fail to explain this accumulation of reserves, the more recent literature argues that reserves are used as a lifejacket against currency crises. However, research so far has neglected the question whether and how central banks change their precautionary reserve holdings after the country was affected by a currency crisis.

This paper tests the hypothesis that central banks revise their reserve policy in the aftermath of currency crises. A dynamic panel data model is estimated for developing and industrial countries covering the period from 1975 to 2003. The evidence suggests that currency crises induce a permanent increase of reserves. This effect is particularly strong for recent currency crises since the Asian financial crisis of 1997-98.

Keywords: International Reserves, Currency Crises

JEL Classification: E58, F31

Suggested Citation

Steiner, Andreas, How Central Banks Prepare for Financial Crises - An Empirical Analysis of the Effects of Crises and Globalization on International Reserve Holdings (May 2009). Paolo Baffi Centre Research Paper No. 2009-57, Available at SSRN: https://ssrn.com/abstract=1444265 or http://dx.doi.org/10.2139/ssrn.1444265

Andreas Steiner (Contact Author)

University of Osnabrueck, Institute of Empirical Economic Research ( email )

Rolandstrasse 8
Osnabrück, D-49069
Germany

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