Real Exchange Rate and International Reserves in the Era of Financial Integration

39 Pages Posted: 30 Jan 2023 Last revised: 21 Jul 2023

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Sy Hoa Ho

Bank for Investment and Development of Vietnam (BIDV); Vietnam National University (VNU) - VNU University of Economics and Business

Luu Duc Toan Huynh

Queen Mary University of London

Jamel Saadaoui

University Paris 8

Gazi Salah Uddin

Linkoping University - Department of Management and Engineering Division

Multiple version iconThere are 2 versions of this paper

Date Written: January 2023

Abstract

The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.

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Suggested Citation

Aizenman, Joshua and Ho, Sy Hoa and Huynh, Luu Duc Toan and Saadaoui, Jamel and Uddin, Gazi Salah, Real Exchange Rate and International Reserves in the Era of Financial Integration (January 2023). NBER Working Paper No. w30891, Available at SSRN: https://ssrn.com/abstract=4342390

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Sy Hoa Ho

Bank for Investment and Development of Vietnam (BIDV) ( email )

BIDV Tower, 35 Hang Voi
Hoan Kiem
Hanoi, 10000
Vietnam

Vietnam National University (VNU) - VNU University of Economics and Business ( email )

E4 Building
144 Xuan Thuy - Cau Giay - Hanoi
Hanoi
Vietnam

Luu Duc Toan Huynh

Queen Mary University of London ( email )

Jamel Saadaoui

University Paris 8

2 rue de la liberté
Saint-Denis

Gazi Salah Uddin

Linkoping University - Department of Management and Engineering Division ( email )

Linköping, 581 83
Sweden

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