Handbook of Exchange Rates

19.3 FX Reserve Sources

At any given point in time, a country's stock of FX reserves reflects two sources of accumulation. First is an accumulation as a deliberate policy to build up the stock of reserves in order to meet potential future uses. An example is the buildup of reserves by Asian central banks following the Asian debt crisis of 1997 and to a lesser extent, following the global financial crisis of 2008/2009 (Fig. 19.1). The second is an accumulation as a by-product of the implementation of policies aimed at managing the exchange rate, which requires adjustment in that stock. In recent years, persistent FX intervention with a view to resisting upward pressure on the exchange rate has played a key role in many countries. This raises the possibility that the stock of FX reserves may be larger than desirable for foreseeable future uses. Unless there is FX debt outstanding that can be retired, it will generally not be easy to reduce it without risking “unwinding” the original effect on the exchange rate. While the desirable amount of FX reserves in light of potential future uses is difficult to determine with any precision, above a certain level, consideration of the deployment of “excess reserves” becomes more relevant. It is interesting to note that this “point” shifts in time and with experience. For example, many central banks believed that they had significant amounts of “excess reserves” before the recent global financial crisis. During the crisis, what had been thought ...