Can Higher Reserves Help Reduce Exchange Rate Volatility?
IMF Working Papers, October 1, 2004
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Bibliographic details
- Authors: M. Nowak, Ketil Hviding, Luca A Ricci
- Published: October 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859645.001
Summary
- Study objective: Examine the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries.
- Sample and period: Panel of 28 countries over the period 1986-2002.
- Controls and identification: 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.
- Main conclusion: 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.
Methodology
- Empirical approach: Panel regression analysis with multiple control variables for monetary indicators, external indicators, and conventional macroeconomic fundamentals.
- Endogeneity control: Explicit control for endogeneity related to exchange rate regime, acknowledging that the regime can influence both reserves and volatility.
Key findings and characteristics
- Reserve effect: Holding adequate reserves reduces exchange rate volatility.
- Strength and robustness: The effect is characterized as strong and robust.
- Nonlinearity and mechanism: The reserve-volatility relationship is nonlinear and appears to operate through a signaling effect.
- Sample specifics: 28 countries; 1986-2002.
Publication and metadata
- Authors: M. Nowak, Ketil Hviding, Luca A Ricci
- Date: October 1, 2004
- Series: IMF Working Papers
- Working Paper No.: 2004/189
- Issue: 189
- Volume: 2004
- Pages: 32
- DOI: https://doi.org/10.5089/9781451859645.001
- Stock No: WPIEA1892004
- ISBN: 9781451859645
- ISSN: 1018-5941
M. Nowak, Ketil Hviding, and Luca A Ricci. "Can Higher Reserves Help Reduce Exchange Rate Volatility?", IMF Working Papers 2004, 189 (2004), October 1, 2004.