Can Higher Reserves Help Reduce Exchange Rate Volatility?

By M. Nowak, Ketil Hviding, Luca A Ricci

October 1, 2004

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Format: Chicago

M. Nowak, Ketil Hviding, and Luca A Ricci. Can Higher Reserves Help Reduce Exchange Rate Volatility?, (USA: International Monetary Fund, 2004) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. Several control variables are introduced in the regressions to account for other factors affecting exchange rate volatility (monetary and external indicators as well as conventional macroeconomic fundamentals). The paper controls for the endogeneity induced by the role of the exchange rate regime, since the regime can affect both the level of reserves and exchange rate volatility. The results provide ample support for the proposition that holding adequate reserves reduces exchange rate volatility. The effect is strong and robust; moreover, it is nonlinear and appears to operate through a signaling effect.

Subject: Emerging and frontier financial markets, Exchange rate arrangements, Exchange rates, Real effective exchange rates, Real exchange rates

Keywords: Exchange rate, Exchange rate regime, Exchange rate volatility, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/189
Stock No:

WPIEA1892004
ISBN:

9781451859645
ISSN:

1018-5941

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