Foreign Exchange Reserve Accumulation in Emerging Markets: What are the Domestic Implications?

14 Pages Posted: 10 Jun 2012

See all articles by Madhusudan S. Mohanty

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department

Philip Turner

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: September 1, 2006

Abstract

This paper discusses some of the domestic implications of the recent large-scale use of foreign exchange intervention by emerging market economies to resist currency appreciation. Over the past five years, many countries have adopted an accommodating monetary policy while intervening. Despite the prolonged period of low interest rates that resulted, various other forces have kept inflation under control and so eased one policy dilemma for central banks. Nevertheless, large and prolonged reserve accumulation can still create risks other than near-term inflation. These include: high intervention costs; monetary imbalances; overheated credit and asset markets; and very liquid and perhaps distorted banking systems.

JEL Classification: E52, E58, F31, F41

Suggested Citation

Mohanty, Madhusudan S. and Turner, Philip, Foreign Exchange Reserve Accumulation in Emerging Markets: What are the Domestic Implications? (September 1, 2006). BIS Quarterly Review, September 2006. Available at SSRN: https://ssrn.com/abstract=1632410

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Philip Turner (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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