Procyclicality in Central Bank Reserve Management: Evidence from the Crisis

28 Pages Posted: 4 Aug 2010

See all articles by Jukka Pihlman

Jukka Pihlman

International Monetary Fund (IMF)

Han van der Hoorn

PGGM Investments

Date Written: June 2010


A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis, when many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety. We estimate that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector. Although clearly not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector, which required offsetting measures by other central banks such as the Federal Reserve and Eurosystem central banks. The behavior highlights a potential conflict between the reserve management and financial stability mandates of central banks. This paper analyzes reserve managers’ actions during the crisis and draws some lessons for strategic asset allocation of reserves going forward.

Suggested Citation

Pihlman, Jukka and van der Hoorn, Han, Procyclicality in Central Bank Reserve Management: Evidence from the Crisis (June 2010). IMF Working Paper No. 10/150, Available at SSRN:

Jukka Pihlman (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Han Van der Hoorn

PGGM Investments ( email )

Noordweg Noord 150
P.O.Box 117
Zeist, 3700 AC

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