Accounting for Reserves

Accounting for Reserves
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Volume/Issue:
2012/302
Series:
IMF Working Papers
Author(s):
Tamim Bayoumi, and Christian Saborowski
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
December 2012
DOI:
http://dx.doi.org/10.5089/9781475535761.001
ISBN:
9781475535761
ISSN:
1018-5941
Page:
37
Views on the effectiveness of sterilized reserve intervention vary. Sterilized intervention is generally seen as ineffective in advanced countries while persistent intervention by some emerging markets is often cited as contributing to undervalued exchange rates and current account surpluses. This paper argues that capital controls reconcile these views. We find strong and highly robust evidence that sterilized intervention is fully offset by outflows of private money in countries without controls, while controls partially block this offset. For a country with extensive capital controls, every dollar in additional reserves increases the current account by some 50 cents. This is mainly offset by an opposite adjustment in the current account of the United States-the dominant reserve currency issuer with the deepest and most liquid bond markets-with a smaller diversion to other emerging markets.
Article

Accounting for Reserves1

Author(s):
Tamim Bayoumi, and Christian Saborowski
Published Date:
December 2012
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