Stability or Upheaval? The Currency Composition of International Reserves in the Long Run

47 Pages Posted: 14 Aug 2014

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Livia Chitu

European Central Bank (ECB)

Arnaud Mehl

European Central Bank (ECB)

Date Written: July 31, 2014

Abstract

We investigate whether the role of national currencies as international reserves was fundamentally altered by the shift from fixed to flexible exchange rates (what we call the “upheaval hypothesis”), a view that gained adherents following the collapse of the Bretton Woods System. We extend standard data on the currency composition of foreign reserves backward and forward in time to test whether there was a shift in the determinants of reserve currency shares around the breakdown of Bretton Woods. We find evidence in favor of this hypothesis. The effects of inertia and the credibility of policies on international reserve currency choice have become stronger post-Bretton Woods, while those associated with network effects have weakened. We also show that negative policy interventions designed to discourage international use of a currency have been easier to implement than positive interventions to encourage international use. These findings speak to current discussions of the prospects of currencies, like the euro and the renminbi, seen to be seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it.

Keywords: international reserves, currency composition, structural change, fixed vs. floating exchange rates

JEL Classification: F30, N20

Suggested Citation

Eichengreen, Barry and Chitu, Livia and Mehl, Arnaud, Stability or Upheaval? The Currency Composition of International Reserves in the Long Run (July 31, 2014). ECB Working Paper No. 1715. Available at SSRN: https://ssrn.com/abstract=2474682

Barry Eichengreen (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Livia Chitu

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Arnaud Mehl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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