Currency Diversification of Reserves and Sovereign Debt for Small Open Economies

Author/Editor:

Indi Rajasingham

Publication Date:

November 1, 1991

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:

An approach for minimizing risk through diversification of foreign exchange reserves and sovereign borrowings is proposed for central banks of small open economies. This approach--developed in a simple 2-period, 3-country framework--differs from past work in that the elements of exchange and price risk associated with trade and payments are considered in the portfolio allocation problem. The analysis shows that the net level of reserves and the primary transactions balance affect the optimal portfolio leading to deviations from the optimal allocation prescribed by the classical portfolio model. In addition, this result has implications for the currency composition of exchange market intervention transactions.

Series:

Working Paper No. 91/109

Subject:

English

Publication Date:

November 1, 1991

ISBN/ISSN:

9781451946086/1018-5941

Stock No:

WPIEA1091991

Format:

Paper

Pages:

48

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