Currency Diversification of Reserves and Sovereign Debt for Small Open Economies
IMF Working Papers, November 1, 1991
Source details
- Canonical URL
- Currency Diversification of Reserves and Sovereign Debt for Small Open Economies
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Bibliographic details
- Authors: Indi Rajasingham
- Published: November 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451946086.001
Summary and approach
- Proposes an approach for minimizing risk through diversification of foreign exchange reserves and sovereign borrowings for central banks of small open economies.
- Approach is developed in a simple 2-period, 3-country framework.
- Differs from past work by explicitly considering the elements of exchange and price risk associated with trade and payments in the portfolio allocation problem.
Key findings and analysis
- The net level of reserves affects the optimal currency portfolio.
- The primary transactions balance affects the optimal currency portfolio.
- These factors lead to deviations from the optimal allocation prescribed by the classical portfolio model.
- Results have implications for the currency composition of exchange market intervention transactions.
Policy implications and recommendations
- Central banks of small open economies should incorporate exchange and price risk associated with trade and payments into reserve and sovereign debt currency allocation decisions.
- Optimal portfolio choice should account for the net level of reserves and the primary transactions balance rather than relying solely on classical portfolio prescriptions.
- The currency composition of intervention transactions should reflect the adjusted optimal allocation derived from the framework that includes trade- and payment-related risks.
Subject coverage and keywords
- Subject areas: Central banks, Currencies, Exchange rates, Foreign exchange, International reserves, Money, Public debt, Reserve currencies, Reserve positions.
- Keywords: allocation problem; allocation weight; central bank; composition of reserves variation; Currencies; currency allocation; currency composition; currency denomination; currency diversification; currency portfolio; Exchange rates; foreign currency; International reserves; intervention currency; optimal portfolio; purchasing power; rate of exchange; Reserve currencies; Reserve positions; unit of currency; WP.