Foreign Reserves Management Subject to a Policy Objective

23 Pages Posted: 1 Jun 2006

See all articles by Joachim Coche

Joachim Coche

European Central Bank - Risk Management Division

Matti Koivu

European Central Bank (ECB)

Ken Nyholm

European Central Bank (ECB)

Vesa Poikonen

European Central Bank (ECB)

Date Written: May 2006

Abstract

This paper studies the implications of introducing an explicit policy objective to the management of foreign reserves at a central bank. A dynamic model is developed which links together reserves management and the exchange rate by foreign exchange interventions. The exchange rate is modelled as a mean-reverting autoregressive process incorporating a linear response to interventions. The premise is that it is the objective of the central bank to prevent undervaluation of its currency. Given this objective, the model is formulated in a one- and a multi-period setting and solved to find the optimal asset allocation. The results show that asset allocation can significantly help in achieving the desired policy objective.

Keywords: Foreign reserves management, foreign exchange intervention, exchange rate modelling, optimal asset allocation

JEL Classification: G11, F31

Suggested Citation

Coche, Joachim and Koivu, Matti and Nyholm, Ken and Poikonen, Vesa, Foreign Reserves Management Subject to a Policy Objective (May 2006). ECB Working Paper No. 624. Available at SSRN: https://ssrn.com/abstract=900394

Joachim Coche

European Central Bank - Risk Management Division ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matti Koivu (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ken Nyholm

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Vesa Poikonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
176
Abstract Views
1,015
rank
184,864
PlumX Metrics