The summary of article coming in the Journal of International Money and Finance.
We begin by examining the determinants of global foreign exchange reserves held by central banks (size of the economy and financial markets of the issuing country, ability of the currency to retain value and inertia). But to understand the determination of reserves, one probably needs to go beyond aggregate figures, but rather observe the behavior of each central bank, including the characteristics of the holding country (bilateral trade with the issuing country, bilateral currency pegs and approximations). bilateral exposure to sanctions). in addition to the characteristics of the issuer of the reserve currency. Currency by currency, holdings in US dollars can be explained quite well by several characteristics of the issuers; but the other currencies are less well explained. Currency-by-currency estimation results may be affected by insufficient sample size. This consideration encourages pooling data on major currencies and imposing constraints whereby reserves are determined in the same way for each currency. In this context, most economic determinants play an important role: economic size measured by GDP, the bilateral currency peg and the share of bilateral trade. While one geopolitical factor (UN vote congruence) is generally important as expected (with the exception of the US dollar), the other geopolitical factor (sanctions) is unimportant.
Here is a picture of global currency shares, taken from the IMF’s COFER database, updated data released June 11.
Figure 1: Share of foreign exchange reserves held by central banks, in USD (blue), EUR (orange), DEM (beige squares), JPY (green), GBP (sky blue), Swiss francs (purple), CNY (red). Using 1999 data, estimates based on COFER data and distribution of unallocated reserves, described in the text. Source: Chinn and Frankel (2007)FMI COFER consulted on 06/20/2024, and author’s estimates.
And here is a detail, from 1999:
Figure 2: Share of foreign exchange reserves held by central banks, in USD (blue), EUR (orange), JPY (green), GBP (sky blue), Swiss francs (purple), CNY (red). Using 1999 data, estimates based on COFER data and distribution of unallocated reserves, described in the text. Source: Chinn and Frankel (2007)FMI COFER consulted on 06/20/2024, and author’s estimates.
The equations used to estimate global shares before EMU are now rather useless for predicting shares. Therefore, in this new article, we rely on individual central bank data to estimate the determinants of actions. The results of a multi-currency analysis grouped between countries, without constraint on variation of the geopolitical distance coefficient according to currencies, are presented in Table 4.
Source: Chinn, Frankel, Ito (forthcoming, JIMF).
Following the results in Chinn and Frankel (2007), we find that economic size matters, as does inertia. Although we find that store of value measures (inflation, exchange rate volatility) have a negative impact, these effects are not statistically significant. This special dataset (central bank by year) allows us to study the impact of trade flows and anchoring, which turns out to be important. We reproduce the result obtained by Goldberg and Hannaoui (2024) that more Geopolitically distant countries (as measured by voting coincidence in the UN General Assembly) hold a greater share of the dollar, while the opposite is true for other currencies. Even if financial sanctions have a negative impact, the measured sensitivity is not statistically significant.
Although we do not explicitly record how dollar shares declined, it is worth noting that other studies (see Arslanalp, Eichengreen and Simpson-Bell (2024)and the references therein) demonstrated that the deficit is generally not mainly compensated by the RMB, but by other unconventional currencies.
See also Recent article by Eswar Prasad on foreign affairsTHE Third Annual Fed-FRBNY Conference on the International Role of the Dollar, Kamin and Sobel (2024)Atlantic Council “Dollar Dominance Monitor”.
