The Size of Foreign Exchange Reserves and Local Currency Internationalization: Cross-Country Evidence
The Singapore Economic Review, Vol. 60, No.4 (2015)
Posted: 26 Aug 2013 Last revised: 15 Dec 2015
Date Written: October 5, 2011
This paper produces the first cross-country evidence on the relationship between the size of foreign exchange reserves and local currency internationalization using a sample of Switzerland, Japan and the UK. It finds that a high ratio of foreign exchange reserves to international reserves has a significant, but negative, impact on local currency internationalization during the period 1976–2009. After controlling for interest rate differential, different indicators for long-run depreciation and volatility of exchange rates, as well as the once-in-a-century global financial crisis of 2007–2009, the above conclusion still holds. Additionally, these results are robust to different methods (Pooled OLS and Pooled IV/2SLS) and measures of the scale of foreign exchange reserves. This study is informative for any policy decisions and will provide a strategic reference for the Chinese government as it optimizes the composition of its international reserves, promotes the process of renminbi (RMB) internationalization and becomes a major power through financial development.
Keywords: foreign exchange reserves; local currency internationalization; cross-country evidence; RMB internationalization.
JEL Classification: F31, F33
Suggested Citation: Suggested Citation