Does Foreign Exchange Reserve Decumulation Lead to Currency Appreciation?

36 Pages Posted: 7 Jun 2010

See all articles by Kathryn M.E. Dominguez

Kathryn M.E. Dominguez

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; National Bureau of Economic Research (NBER)

Rasmus Fatum

University of Alberta - Department of Marketing, Business Economics & Law

Pavel Vacek

Charles University in Prague - Institute of Economic Studies

Date Written: June 2010

Abstract

Many developing countries have increased their foreign reserve stocks dramatically in recent years, often motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.

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Suggested Citation

Dominguez, Kathryn M.E. and Fatum, Rasmus and Vacek, Pavel, Does Foreign Exchange Reserve Decumulation Lead to Currency Appreciation? (June 2010). NBER Working Paper No. w16044, Available at SSRN: https://ssrn.com/abstract=1620721

Kathryn M.E. Dominguez (Contact Author)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

Lorch Hall
Ann Arbor, MI 48109
United States
313-764-3490 (Phone)
734-763-9181 (Fax)

HOME PAGE: http://www-personal.umich.edu/~kathrynd/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rasmus Fatum

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3951 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.bus.ualberta.ca/rfatum

Pavel Vacek

Charles University in Prague - Institute of Economic Studies ( email )

Opletalova 26
Prague, 11000
Czech Republic

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