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Procyclicality in Central Bank Reserve Management: Evidence from the Crisis

Author/Editor: Jukka Pihlman | Han van der Hoorn
Authorized for Distribution: June 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,181KB)
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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: A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis, when many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety. We estimate that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector. Although clearly not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector, which required offsetting measures by other central banks such as the Federal Reserve and Eurosystem central banks. The behavior highlights a potential conflict between the reserve management and financial stability mandates of central banks. This paper analyzes reserve managers’ actions during the crisis and draws some lessons for strategic asset allocation of reserves going forward.
 
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Series: Working Paper No. 10/150
Subject(s): Reserve management policy | Central banks | Asset management | Resource allocation | Banking sector | Financial stability | Risk management
Author's keyword(s): Central banks; financial crises; financial stability; reserve management; risk management.
 
English  
    Published:   June 1, 2010        
    ISBN/ISSN:   9781455201334   Format:   Paper
    Stock No:   WPIEA2010150   Pages:   93
    Price:   US$18.00
       
     
Please address any questions about this title to publications@imf.org.