Real exchange rate and international reserves in the era of financial integration

Article co-written by Jamel Saadaoui, with Joshua Aizenman, Sy-Hoa Ho, Luu Duc Toan Huynh and Gazi Salah Uddin, published in the VoxEU columns, the CEPR’s (Centre for Economic Policy Research) portal, on November 6, 2023.

“International reserves provide buffers against external financial shocks but maintaining reserves has a high cost, which needs careful consideration and strategic management. This column uses data from 110 countries between 2001 and 2020 to show the significant buffer effect of international reserves. The effects are stronger in Europe and Central Asia when reserves exceed 17% of GDP. The development level of financial institutions and financial openness emerge as crucial factors. Policymakers are advised to tailor reserve strategies to their country’s unique financial landscape, ensuring resilience and stability in today’s interconnected economy.”