The social cost of foreign exchange reserves

Abstract

There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not seem too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.     

Speculative attacks with unpredictable or unknown foreign exchange reserves

During a currency crisis, speculators usually do not know the value of a central bank's foreign exchange reserves. In this paper I show that modelling speculators as having imperfect knowledge of reserves enriches the predictions of the classical model of speculative attacks. With realistic lags in reserve reporting and costs to unsuccessful speculation, successful speculative attacks will involve a jump depreciation, unsuccessful attacks may occur, attacks may occur when fundamentals are improving, attacks may not be preceded by large increases in interest rates, and fixed exchange rates may be abandoned with no attack and no decline in the money supply. JEL Classification: F31     

我国外汇储备急剧增长的原因及实证检验

截至2011年6月,我国外汇储备已高达31 975亿美元。贸易顺差、人民币汇率、外商直接投资和货币供给量被普遍认为是影响我国外汇储备规模的普遍因素。通过实证分析探讨了这些因素与外汇储备急剧增长之间的关系,并给出了相应的政策建议。     

当前顺差、外汇储备和资产泡沫关系探讨

2006年我国贸易顺差达到创历史纪录的1774.7亿美元.顺差过多导致外汇储备过多,人民币升值压力增大,使得宏观调控特别是货币政策效果减弱,并且催生货币流动性过剩,导致国内股市和房地产有泡沫化趋势.目前大多数观点认为这种资产泡沫化趋势如不采取有力措施尽快调控将产生重大危害.本文认为过度资产泡沫很可能演变为金融危机,但是温和的泡沫对于目前国内经济是有利的.通过制定合理的政策,可以发挥资产泡沫的正面作用,缓解目前产能过剩与顺差的问题.     

Seasonality in foreign exchange volatility

The paper reports further empirical evidence on seasonality in foreign exchange volatility using high-frequency data. Using a basis of the signal plus noise framework, the approach decomposes tick-by-tick Reuters FXFX quotes into a random walk and a stationary component, termed the efficient price and the pricing error, respectively. The efficient price is not directly observable and is an approximation of the ‘true’ value. The pricing error captures the deviation between the observed indicative quote and the efficient price. Under the proposed model, daily and intraday volatilities of the efficient price are estimated. A pronounced pattern of volatility is uncovered and appears related to the daily activity cycle of major organized stock exchanges. It is argued that seasonality in volatility is a symptom of foreign exchange markets. Results confirm Andersen and Bollerslev's findings that significant seasonal effects are one important determinant of overall volatility at high frequencies.     

Global impact of a shift in foreign reserves to euros

This paper uses QUEST III, a multi-region DSGE model, to study the macroeconomic effects of a gradual equalization of official foreign reserves between dollars and euros. We simulate a scenario of a shift in the composition of foreign reserves holdings from the present ratio of 65% dollars and 25% euros to equal 45% shares over a 10 years period. We assume imperfect substitutability between financial assets to allow this shift to have real effects. Our simulations point towards small real effects due to the reduction in real interest rates resulting from this shift in official holdings.

Sustainable management of renewable resources: an experimental investigation in continuous time

This study addresses one of the most basic questions in renewable resource management: the ability of economic agents to exploit a renewable resource in an efficient and sustainable manner. In a laboratory experiment, subjects are presented with renewable resource extraction problems, where optimal management will lead to a stable steady state. A test of sustainability of the extraction practices shows that extraction behaviour results in steady states only 56% of the time. The mode of the steady state distribution coincides with the optimal steady state extraction. The trade-off between accruing a higher payoff in the present and sustaining the resource for future exploitation leads to suboptimal behaviours such as initial overextraction of the resource compared to the optimal extraction policy, costly downward adjustment of the extraction later in time, and settling down for lower long-run resource and extraction. The suboptimal behaviours lead to 17% loss in efficiency on average in terms of the accumulated payoff. We further look at extraction behaviour in terms of the degree of impatience it projects and find, based on their extraction decisions, that most of our subjects seem more impatient in managing their resource than is justified by the decision-making problem presented to them.     

Devaluation,pass-through and foreign reserves dynamics in a tourism economy

This paper examines the effects of currency devaluations on goods prices and foreign reserves for a small-open economy with inbound tourism. Tourism transforms non-traded goods into exportable goods. Devaluations yield an over pass-through to the prices of the non-traded tourism goods. This may hurt the trade balance and hence lead to a decline in foreign reserves for the economy.     

Growth of China's foreign exchange reserve

China's growing foreign exchange reserve is estimated to exceed $2 trillion by 2010. The purpose of its paper is to examine its impact on the balance sheet of the Chinese central bank, the money supply and the bond market. The paper will then move on to discuss its social welfare effect by comparing the estimated future return of the foreign exchange reserves with its opportunity costs measured by the potential return of domestic investments.     

Intra-day seasonality in foreign exchange market transactions

This paper examines the intra-day seasonality of transacted limit and market orders in the DEM/USD foreign exchange market. Empirical analysis of completed transactions data based on the Dealing 2000-2 electronic inter-dealer broking system indicates significant evidence of intra-day seasonality in returns and return volatilities under usual market conditions. Moreover, analysis of realised tail outcomes supports seasonality for extraordinary market conditions across the trading day.     

Return seasonality in the foreign exchange market

I examine return seasonality in the foreign exchange market using currency futures during the period 1973?2015. All the G10 currency futures yield negative returns in January and this effect happens more often in the countries that have a tax year ending in December. In contrast, returns offered in April are positive. To exploit these anomalies, I use a seasonality strategy that selects portfolios based on their historical same-calendar-month returns. I find that this strategy does not work in the currency market, although I find consistent results with Keloharju et al. in the stock portfolios.     

Heterogeneous expectations in the foreign exchange market

In this study a regime-switching approach is applied to estimate the chartist and fundamentalist (c&f) exchange rate model originally proposed by Frankel and Froot (1986). The c&f model is tested against alternative regime-switching specifications applying likelihood ratio tests. Nested atheoretical models like the popular segmented trends model suggested by Engel and Hamilton (1990) are rejected in favour of the multi-agent model. Our findings turned out to be relatively robust when assessing the models sub-sample estimates and out-of-sample performance.JEL Classification: F31, F37, G12, G15 Correspondence to: S. Reitz     

国际工程承包项目汇率风险应对

随着人民币汇率的上升,许多中国承包商在国际工程项目上,特别是以美元作为收支款项货币的项目,因未能采取有效的汇率风险防范措施蒙受了巨大的利润损失,有的甚至陷入了亏损的境地.未来的汇率走势难以预测,承包商应当对汇率风险采取适当的措施加以管理.本文以国际工程项目寿命周期为主线,研究承包商在项目各个阶段的汇率风险应对方法.     

A fractal analysis of foreign exchange markets

Long memory in foreign exchange markets is examined for the post-Bretton Woods period using Lo's [1991] modified rescaled range (R/S). Conventional R/S techniques are presented for comparison. Unlike conventional techniques, Lo's analysis is robust to short-term dependence and conditional heteroskedasticity. Significant long memory and fractal structure are conclusively demonstrated for all 22 countries studied, indicating that traditional econometric methods are inadequate for analyzing foreign exchange markets. However, short-term dependence and conditional heteroskedasticity are also present, making it difficult to describe the nature of the long memory process or processes in foreign exchange markets. The average nonperiodic cycle ranges from 7 months for Canada and the United Kingdom, to approximately 20 months for Austria, Finland, France, Germany, Ireland, Japan, Malaysia, Netherlands, Sweden, and Switzerland. No support is found for the efficient market hypothesis. Results broadly agree with those provided by less sophisticated, less robust R/S methodologies and suggest the possibility that traditional technical analysis should be able to achieve systematic positive returns. This paper was presented at the Forty-Sixth International Atlantic Economic Conference, Boston, MA, October 8–11, 1998. The author is profoundly indebted to the session discussant, Takashi Kamihigashi, and to Nicholas Apergis for many helpful comments, to colleague Patrick Allen Hays who provided FORTRAN programs to estimateH and perform the Lo analysis and who provided immeasurably invaluable advice and support, to student Mark Douglas Wells, Jr. who assisted as part of the undergraduate honors project in the Honors College of Western Carolina University, and to an anonymous referee whose comments greatly improved the paper. Responsibility for any shortcomings belong to the author.     

Removing foreign direct investment's exchange rate risk in developing economies: the case for a foreign exchange custodian board

This paper proposes a system design (foreign exchange custodian board) that may stimulate foreign direct investment (FDI) in developing economies through the removal of foreign investors' exchange rate risk in investment outlay. For any expected distribution of exchange rate on any interval around the starting exchange rate, there exists a non-negative custodian service charge that both the developing economy and foreign investors can benefit from the proposed system. When the increase in domestic factors' value added caused by FDI is sufficiently large, the developing economy will benefit even in the absence of any custodian service charge.     

Financial amplification of foreign exchange risk premia

Theories of financial frictions in international capital markets suggest that financial intermediaries' balance sheet constraints amplify fundamental shocks. We present empirical evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals, and a component associated with financial intermediary balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to financial stability monitoring.     

Central bank secrecy in the foreign exchange market

This paper argues that with sticky goods prices and a forward-looking exchange rate, the central bank will only want a partial dissemination of its information about shocks to the economy. It is shown that, in such a model, the central bank may prefer to intervene secretly in the foreign exchange markets when responding in anticipation of future shocks, but openly when reacting to current shocks. The model thus provides a rationale for secrecy in central bank foreign exchange operations. The model also elucidates the relationship between the signaling and portfolio balance channels of sterilized intervention.     

The foreign exchange constraint,suppression of the trade deficit and the shadow price of foreign exchange in a fix-price economy

The foreign exchange gap is analysed as a possible feature of a fix-price economy. The implications of closing the gap by means of import rationing are then discussed. Finally, a set of shadow rates of exchange is derived. These shadow prices are conditional on the prevailing regimes, and include the paradoxical possibility of a negative shadow rate of exchange.     

Non-constant discounting in continuous time

This paper derives the dynamic programming equation (DPE) to a differentiable Markov Perfect equilibrium in a problem with non-constant discounting and general functional forms. Beginning with a discrete stage model and taking the limit as the length of the stage goes to 0 leads to the DPE corresponding to the continuous time problem. The note discusses the multiplicity of equilibria under non-constant discounting, calculates the bounds of the set of candidate steady states, and Pareto ranks the equilibria.