Working Paper: NBER ID: w12363
Authors: Joshua Aizenman; Daniel Riera-Crichton
Abstract: This paper evaluates the impact of international reserves, terms of trade shocks and capital flows on the real exchange rate (REER). We observe that international reserves cushions the impact of TOT shocks on the REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. Financial depth reduces the buffer role of IR in developing countries. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER.
Keywords: International Reserves; Terms of Trade; Real Exchange Rate
JEL Codes: F15; F21; F32; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International Reserves (F31) | Real Exchange Rate (REER) (F31) |
| Terms of Trade (TOT) shocks (F14) | Real Exchange Rate (REER) (F31) |
| International Reserves (F31) | Sensitivity of REER to TOT changes (F29) |
| Financial Depth (G32) | Mitigation role of Reserves (Q54) |
| Higher International Reserves (F30) | Depreciated Real Exchange Rate (REER) (F31) |