The Currency Composition of International Reserves, Demand for International Reserves, and Global Safe Assets

39 Pages Posted: 11 Jun 2019

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance; University of California, Santa Cruz - Department of Economics; University of California at Santa Cruz - Department of Economics

Xingwang Qian

State University of New York, Buffalo State

Date Written: June 2019

Abstract

This paper examines determinants of the international reserves (IR) currency composition before and after the Global Financial Crisis (GFC). Applying the annual data of 58 countries, we confirm that countries that trade more with the US, euro zone, UK, and Japan, and issue more debt denominated in the big four currencies (US dollar, euro, pound, yen) hoard more IR in these currencies. We find scale effects in which countries tend to diversify from the big four currencies as they increase their IR/GDP and that a growing shortage of global safe assets (GSAs) induces countries to hold more big four currencies. Countries hold less big four currencies as IR after the 2008 GFC, while they hold more of such currencies since the tapering of the Fed’s quantitative easing. The 2008 GFC and QE tapering weakened and sometimes reversed the effect of several economic factors. We also find that TARGET2 balances matter for the currency composition in the euro zone; commodity-exporting countries tend to diversify their IR from the big four currencies when their terms of trade improve; and that the valuation effects induced by Euro/USD exchange rate changes diminish the significance of the GFC in explaining the currency composition of IR.

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Suggested Citation

Aizenman, Joshua and Cheung, Yin-Wong and Qian, Xingwang, The Currency Composition of International Reserves, Demand for International Reserves, and Global Safe Assets (June 2019). NBER Working Paper No. w25934. Available at SSRN: https://ssrn.com/abstract=3401640

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance ( email )

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University of California, Santa Cruz - Department of Economics ( email )

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University of California at Santa Cruz - Department of Economics ( email )

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Xingwang Qian

State University of New York, Buffalo State ( email )

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Buffalo, NY 14222
United States
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716-878-6907 (Fax)

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