Accounting for Reserves

Author/Editor: Tamim Bayoumi ; Christian Saborowski
Publication Date: December 21, 2012
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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: Views on the effectiveness of sterilized reserve intervention vary. Sterilized intervention is generally seen as ineffective in advanced countries while persistent intervention by some emerging markets is often cited as contributing to undervalued exchange rates and current account surpluses. This paper argues that capital controls reconcile these views. We find strong and highly robust evidence that sterilized intervention is fully offset by outflows of private money in countries without controls, while controls partially block this offset. For a country with extensive capital controls, every dollar in additional reserves increases the current account by some 50 cents. This is mainly offset by an opposite adjustment in the current account of the United States—the dominant reserve currency issuer with the deepest and most liquid bond markets—with a smaller diversion to other emerging markets.
Series: Working Paper No. 12/302
Subject(s): Capital controls | Reserves | Intervention | Reserves accumulation | Emerging markets | Developed countries

Publication Date: December 21, 2012
ISBN/ISSN: 9781475535761/1018-5941 Format: Paper
Stock No: WPIEA2012302 Pages: 37
US$18.00 (Academic Rate:
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