On the Effectiveness of Foreign Exchange Reserves During the 2021-22 U.S. Monetary Tightening Cycle

20 Pages Posted: 13 Feb 2023 Last revised: 10 Jan 2025

See all articles by Rashad Ahmed

Rashad Ahmed

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Joshua Aizenman

University of Southern California - Department of Economics

Jamel Saadaoui

Université Paris VIII Vincennes-Saint-Denis

Gazi Salah Uddin

Linkoping University - Department of Management and Engineering Division

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Date Written: February 2023

Abstract

This paper examines whether the size of foreign exchange (FX) reserves can explain cross-country differences in foreign currency depreciation observed over the 2021-22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Across a broad sample of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation and this buffer effect was larger among less financially developed economies. Effects were more pronounced for large-reserve countries that sold reserves to intervene than for large-reserve countries that did not intervene, lending support to the presence of both balance sheet and intervention channels. Higher ex-ante policy rates were also associated with less depreciation especially among financially open economies. An analysis of daily currency movements following the June 2021 FOMC meeting corroborates these results. These findings suggest that FX reserves may promote monetary policy independence in the presence of global spillovers.

Suggested Citation

Ahmed, Rashad and Aizenman, Joshua and Saadaoui, Jamel and Uddin, Gazi Salah, On the Effectiveness of Foreign Exchange Reserves During the 2021-22 U.S. Monetary Tightening Cycle (February 2023). NBER Working Paper No. w30935, Available at SSRN: https://ssrn.com/abstract=4356219

Rashad Ahmed (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Joshua Aizenman

University of Southern California - Department of Economics ( email )

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

Jamel Saadaoui

Université Paris VIII Vincennes-Saint-Denis ( email )

2 rue de la Liberté
Saint-Denis, 93200
France

Gazi Salah Uddin

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

Linköping, 581 83
Sweden

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