Measurement and Inference in International Reserve Diversification
Quantity shares of the US dollar and the euro tend to rise in total global foreign exchange reserves when these currencies are declining and vice versa. Such behavior is consistent with net stabilizing diversification, under which monetary authorities intervene in foreign exchange markets against the market trend. The paper finds that Japan was the source of the large stabilizing diversification over the period 1999Q1-2005Q4. The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. The paper reaches these conclusions by examining data on decreasing aggregation levels. It applies the preferred methodology (moving average exchange rate conversion) to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund's Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings.