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

54 Pages Posted: 20 Jul 2006 Last revised: 14 Oct 2022

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Daniel Riera-Crichton

University of California, Santa Cruz - Department of Economics

Date Written: July 2006

Abstract

This paper evaluates the impact of international reserves, terms of trade shocks and capital flows on the real exchange rate (REER). We observe that international reserves cushions the impact of TOT shocks on the REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of IR in developing countries. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER.

Suggested Citation

Aizenman, Joshua and Riera-Crichton, Daniel, Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration (July 2006). NBER Working Paper No. w12363, Available at SSRN: https://ssrn.com/abstract=917568

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

Daniel Riera-Crichton

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

Santa Cruz, CA 95064
United States

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