The Currency Composition of International Reserves, Demand for International Reserves, and Global Safe Assets
This paper examines determinants of the international reserves (IR) currency composition before and after the Global Financial Crisis (GFC). Applying the annual data of 58 countries, we confirm that countries that trade more with the US, euro zone, UK, and Japan, and issue more debt denominated in the big four currencies (US dollar, euro, pound, yen) hoard more IR in these currencies. We find scale effects in which countries tend to diversify from the big four currencies as they increase their IR/GDP and that a growing shortage of global safe assets (GSAs) induces countries to hold more big four currencies. Countries hold less big four currencies as IR after the 2008 GFC, while they hold more of such currencies since the tapering of the Fed’s quantitative easing. The 2008 GFC and QE tapering weakened and sometimes reversed the effect of several economic factors. We also find that TARGET2 balances matter for the currency composition in the euro zone; commodity-exporting countries tend to diversify their IR from the big four currencies when their terms of trade improve; and that the valuation effects induced by Euro/USD exchange rate changes diminish the significance of the GFC in explaining the currency composition of IR.
We would to like thank Shi He, Roger Lee, and Tianyu Wang for research assistance. Useful comments of Michael Hutchison, Paul Luk, Kishen Rajan, Frank Westermann, Matthew Yiu, and the participants at the Conference on Global Safe Assets, International Reserves, and Capital Flow, May 20-21, 2019, Hong Kong are gratefully acknowledged. Of course, we are responsible for any remaining deficiencies or errors. The work described in this paper was partially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project #: CityU 11500617). Aizenman gratefully acknowledges the financial support of the Dockson Chair at the University of Southern California. Cheung gratefully acknowledges the Hung Hing Ying and Leung Hau Ling Charitable Foundation (孔慶熒及梁巧玲慈善基金) for its support through the Hung Hing Ying Chair Professorship of International Economics (孔慶熒講座教授(國際經濟)). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Joshua Aizenman & Yin-Wong Cheung & XingWang Qian, 2019. "The currency composition of international reserves, demand for international reserves, and global safe assets," Journal of International Money and Finance, . citation courtesy of