Working Paper: NBER ID: w16044
Authors: Kathryn Me Dominguez; Rasmus Fatum; Pavel Vacek
Abstract: Many developing countries have increased their foreign reserve stocks dramatically in recent years, often motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.
Keywords: foreign exchange reserves; currency appreciation; Czech National Bank; reserve sales; exchange rate
JEL Codes: E58; F31; F32; F55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Czech National Bank reserve sales (F31) | CZK exchange rate appreciation (F31) |
| Discretionary reserve sales (E58) | CZK exchange rate appreciation (F31) |
| Rules-based reserve sales (D45) | CZK exchange rate appreciation (F31) |
| Systematic nature of reserve sales (Q21) | CZK exchange rate appreciation (F31) |