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New post by Jamel Saadaoui

04 December 2023 Blog
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Why do emerging economies hold so many foreign exchange reserves in an era of financial integration?

By Jamel Saadaoui, BETA, CNRS, University of Strasbourg

In an era of strong financial integration, we study the relationship between the real exchange rate and international reserves using non-linear and threshold regressions on 110 countries from 2001 to 2020. Our study shows that the level of development of financial institutions plays a key role in explaining the mitigating effect of international reserves. Countries with underdeveloped financial institutions can use their international reserves as a shield to cope with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find that the mitigating effect is greater in countries with intermediate levels of financial openness.

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