Currency Diversification of Reserves and Sovereign Debt for Small Open Economies
November 1, 1991
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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.
Subject: Central banks, Currencies, Exchange rates, Foreign exchange, International reserves, Money, Public debt, Reserve currencies, Reserve positions
Keywords: allocation problem, allocation weight, central bank, composition of reserves variation, Currencies, currency allocation, currency composition, currency denomination, currency diversification, currency portfolio, Exchange rates, foreign currency, International reserves, intervention currency, optimal portfolio, purchasing power, rate of exchange, Reserve currencies, Reserve positions, unit of currency, WP
Pages:
48
Volume:
1991
DOI:
Issue:
109
Series:
Working Paper No. 1991/109
Stock No:
WPIEA1091991
ISBN:
9781451946086
ISSN:
1018-5941
