The Currency Composition of Foreign Exchange Reserves

Abstract

Determinants of the currency composition of foreign exchange reserves are examined for both industrial and developing countries. Empirical results indicate that the currency composition of reserves during the period 1976-85 has been influenced by each country's exchange rate arrangements, trade flows with reserve-currency countries, and the currency in which its debt service payments are denominated. The evidence suggests that managing the currency composition of a country's net foreign asset position is done more cheaply by altering the currency of denomination of assets and liabilities that are not held as reserve assets.