On the Effectiveness of Foreign Exchange Reserves During the 2021-22 U.S. Monetary Tightening Cycle

Rashad Ahmed, Joshua Aizenman, Jamel Saadaoui and Gazi Uddin

No 30935, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines whether the size of foreign exchange (FX) reserves can explain cross-country differences in foreign currency depreciation observed over the 2021-22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Across a broad sample of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation and this buffer effect was larger among less financially developed economies. Effects were more pronounced for large-reserve countries that sold reserves to intervene than for large-reserve countries that did not intervene, lending support to the presence of both balance sheet and intervention channels. Higher ex-ante policy rates were also associated with less depreciation especially among financially open economies. An analysis of daily currency movements following the June 2021 FOMC meeting corroborates these results. These findings suggest that FX reserves may promote monetary policy independence in the presence of global spillovers.

JEL-codes: F32 F40 F68 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-opm
Note: IFM
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Citations: View citations in EconPapers (4)

Published as Rashad Ahmed & Joshua Aizenman & Jamel Saadaoui & Gazi Salah Uddin, 2023. "On the effectiveness of foreign exchange reserves during the 2021–22 U.S. monetary tightening cycle," Economics Letters, .

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Journal Article: On the effectiveness of foreign exchange reserves during the 2021-22 U.S. monetary tightening cycle (2023)
Working Paper: On the Effectiveness of Foreign Exchange Reserves during the 2021-22 U.S. Monetary Tightening Cycle (2023)
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