Sudden Stops in Emerging Economies: The Role of World Interest Rates and Foreign Exchange Intervention

Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)

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India's International Reserves: How Large and How Diversified?

Global Economy Journal ◽

10.2202/1524-5861.1623 ◽

2010 ◽

Vol 10 (3) ◽

pp. 1850202 ◽

Cited By ~ 2

Author(s):

Ramkishen S. Rajan ◽

Sasidaran Gopalan

Keyword(s):

Foreign Exchange ◽

Emerging Economies ◽

Currency Crises ◽

Gold Deposits ◽

International Reserves ◽

International Capital ◽

Foreign Exchange Intervention ◽

Reserve Bank ◽

Currency Composition ◽

High Degree

Asymmetric foreign exchange intervention by the Reserve Bank of India (RBI) has resulted in a sustained accretion of India’s foreign exchange reserves. The reserve buildup in India has certainly been impressive, rising from around US$5-6 million in 1991, to nearly US$300 billion in mid 2008. In addition to addressing the issues of reserve adequacy, this paper examines the forms the reserves have taken (asset and currency composition), and the extent to which India’s reserve holdings are diversified. The issue of reserve adequacy was made apparent during the 1990s and early 2000 when rapid reserve depletion became a defining and determining feature of the series of currency crises that hit emerging economies. In order to assess the adequacy of India’s stock of international reserves, the paper considers a few standard measures used in literature and finds that India’s reserve stock is more than adequate, placing them in a much better position than many other emerging economies. The paper goes on to examine the asset and currency composition of such reserves. More than 50 percent of India’s reserve holdings have been in the form of foreign currencies and deposits as cash, followed by investments in foreign securities and gold deposits, in that order, reflecting a high degree of risk aversion by the RBI in the management of the reserves. While data on asset composition are available, the currency composition of reserves is a well-guarded secret. Hence the paper undertakes some simulation exercises to arrive at some reasonable guesstimates of such a composition. The paper also makes use of the Treasury International Capital Reporting System (TIC) data to track India’s investments in the U.S. securities, thereby assessing the weight of U.S. dollar assets in India’s reserve holdings.

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Foreign exchange intervention and inflation targeting: The role of credibility

Journal of Economic Dynamics and Control ◽

10.1016/j.jedc.2019.07.002 ◽

2019 ◽

Vol 106 ◽

pp. 103716

Author(s):

Gustavo Adler ◽

Ruy Lama ◽

Juan Pablo Medina

Keyword(s):

Foreign Exchange ◽

Inflation Targeting ◽

Foreign Exchange Intervention

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Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all?

Journal of International Money and Finance ◽

10.1016/j.jimonfin.2015.07.015 ◽

2015 ◽

Vol 57 ◽

pp. 185-199 ◽

Cited By ~ 10

Author(s):

Rasmus Fatum

Keyword(s):

Interest Rates ◽

Foreign Exchange ◽

Foreign Exchange Intervention ◽

Portfolio Balance

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Business Cycles in Emerging Economies: The Role of Interest Rates

10.21034/sr.335 ◽

2004 ◽

Author(s):

Pablo Andrés Neumeyer ◽

Fabrizio Perri

Keyword(s):

Business Cycles ◽

Interest Rates ◽

Emerging Economies

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ROLE OF GOLD IN FOREIGN EXCHANGE RESERVES OF COMMODITY EXPORTING COUNTRIES

JOURNAL OF EUROPEAN ECONOMY - No 1 (2018) ◽

10.35774/jee2021.02.211 ◽

2021 ◽

Vol 20 (Issue Vol 20, No 2 (2021)) ◽

pp. 211-232

Author(s):

Viktor KOZIUK

Keyword(s):

Interest Rates ◽

Foreign Exchange ◽

Portfolio Management ◽

Commodity Prices ◽

Foreign Exchange Reserves ◽

Trade Shocks ◽

Reserve Management ◽

Declining Demand ◽

Large Reserve

The gold is still a reserve asset with specific features yet the variants of reserve management have improved considerably. Tendency to maintain ultra-low real interest rates potentially should affect the upward shift in demand on gold because alternative costs of holding it are declining. Demand for gold has indeed risen from the side of central banks recently. At the same time, there is no consensus in economic literature about optimal share of gold in foreign exchange reserves. However, it is presumed that incentives for more diversification are stronger than reserves hoarding is abnormal. Commodity exporters have accumulated large reserve over the last decades. Thus, their diversification decisions in favour of gold seem to be natural. However, empirical analysis paints a more complicated picture. A) Commodity exporters are getting to be more and more heterogeneous in terms holding gold as a share of foreign assets. Such heterogeneity is more vivid compared to the world as a whole. B) Distribution of gold reserves among commodity exporters is changing toward increasing number of countries with gold holdings over the median size for the group. C) There is direct correlation between global commodity prices and gold holdings in tons, but an inverse relationship in the case of share of gold in reserves. This leads to the conclusion that there are two types of demand on gold: endogenous as a function of gradual hoarding of foreign exchange reserves, and specific, that is driven by specific portfolio management needs and non-economic factors. This finding is consistent with features of holding reserves in countries with large hoarding and strong vulnerability to terms-of-trade shocks and features of political regimes in countries with resource abundance.

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