Do Sales of Foreign Exchange Reserves Lead to Currency Appreciation?

Journal of Money, Credit and Banking, Vol. 45, Issue 5, pp. 867-890, August 2013

University of Alberta School of Business Research Paper No. 2013-1207

Posted: 16 Aug 2013

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: July 11, 2013

Abstract

We employ novel time-stamped reserve sales data, provided by the Czech National Bank (CNB), to carry out a time-series analysis of the exchange rate implications of Czech reserve sales aimed at mitigating valuation losses on Euro-denominated assets. The sales were explicitly not intended to influence the value of the koruna relative to the euro. The period under study includes a well-defined regime change in the CNB's approach to reserves sales, allowing us to address whether the manner in which the sales are carried out matters for their influence on the relative value of the domestic currency. We find little evidence that reserve sales influence the exchange rate when sales are carried out on a discretionary and relatively infrequent basis. However, when the sales are carried out daily, we find a statistically and economically significant appreciation of the domestic currency follows.

Keywords: foreign exchange reserves, exchange rate determination, high-frequency volatility modeling

JEL Classification: E58, F31, F32, F55

Suggested Citation

Dominguez, Kathryn M.E. and Fatum, Rasmus and Vacek, Pavel, Do Sales of Foreign Exchange Reserves Lead to Currency Appreciation? (July 11, 2013). Journal of Money, Credit and Banking, Vol. 45, Issue 5, pp. 867-890, August 2013, University of Alberta School of Business Research Paper No. 2013-1207, Available at SSRN: https://ssrn.com/abstract=2310708

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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