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

Economics Letters, volume 233, 2023[10.1016/j.econlet.2023.111367]

13 Pages Posted: 20 Jul 2023 Last revised: 8 Feb 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

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2023

Abstract

This paper examines whether levels of foreign exchange (FX) reserves and other fundamental factors 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. Considering a broad cross-section 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. Higher ex-ante policy rates were also associated with less depreciation, especially among financially open economies. Taken together, these results support the buffering role of FX reserves and their potential to promote monetary policy independence in the presence of international spillovers.

Keywords: International Reserves, Trilemma, Global Financial Cycle, Currency Risk, Spillovers

JEL Classification: F3, F31, F32, F36

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 15, 2023). Economics Letters, volume 233, 2023[10.1016/j.econlet.2023.111367], Available at SSRN: https://ssrn.com/abstract=4507331 or http://dx.doi.org/10.1016/j.econlet.2023.111367

Rashad Ahmed

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 (Contact Author)

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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