International reserves revisited : long-run determinants and short-run dynamics after Bretton Woods
This thesis examines a number of issues related to central bank international reserves holdings and foreign exchange intervention. We study the long run determinants of reserves within the context of the post Bretton Woods dirty float period. It is argued that traditional approaches fail to take account of central bank attempts to influence the real exchange rate by foreign exchange intervention. Additionally, we update previous research by employing recent developments in the non-stationary timeseries and panel data literature. In particular, we utilise the Johansen VAR technology and recent innovations in panel cointegration, to assess the long-run determinants of reserves and short-run dynamics. By jointly modelling the UK reserve holdings and the monetary sector we consider the domestic economy impact of reserve changes, the stability of narrow money demand and whether monetary disequilibria effect reserves as suggested by the Monetary Approach to the Balance of Payments. The effects of daily US and German foreign exchange intervention on exchange rate volatility are also studied. We find evidence consistent with other research that US intervention reduces volatility and extend these results to bilateral rates not previously considered. Moreover, we find evidence in favour of the distinction between unilateral and concerted intervention and of the existence of policy externalities, underlining the importance of international policy coordination.