Can Higher Reserves Help Reduce Exchange Rate Volatility?

33 Pages Posted: 17 Jan 2006

See all articles by Ketil Hviding

Ketil Hviding

International Monetary Fund (IMF)

Micheal Nowak

International Monetary Fund (IMF)

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Date Written: October 2004

Abstract

This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. 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. 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.

Keywords: Foreign exchange volatility, reserves, reserve adequacy

JEL Classification: F30, F31

Suggested Citation

Hviding, Ketil and Nowak, Micheal and Ricci, Luca Antonio, Can Higher Reserves Help Reduce Exchange Rate Volatility? (October 2004). IMF Working Paper No. 04/189, Available at SSRN: https://ssrn.com/abstract=875640 or http://dx.doi.org/10.2139/ssrn.875640

Ketil Hviding

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Micheal Nowak

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Luca Antonio Ricci (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6007 (Phone)
202-623-4072 (Fax)

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