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on International Finance |
| By: | Linda S. Goldberg; Oliver Zain Hannaoui; Sneha Parthasarathy |
| Abstract: | The dollar’s share of global official foreign exchange reserves fell from 64 percent in 2015 to 56 percent in 2025. This downward trajectory is sometimes read as evidence that the dollar’s role in international financial markets is eroding. However, aggregate statistics obscure the composition of changes occurring at the country level. In this post, we show that the aggregate decline is not a systematic global shift away from dollar assets. Rather, the aggregate decline reflects the actions of a handful of large reserve holders, changing either their currency preferences or the size of their reserve portfolio. From the perspective of the cross section of countries holding dollar assets, the dollar’s status in official portfolios is largely intact. |
| Keywords: | global foreign exchange reserves; global reserves; dollar status; Global FX reserves |
| JEL: | F3 F5 |
| Date: | 2026–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103729 |
| By: | Ozge Akinci; Ṣebnem Kalemli-Özcan |
| Abstract: | We study how increased uncertainty about U.S. asset returns affects global asset prices and exchange rates in a two-country model with intermediary balance-sheet constraints. Empirically, uncertainty shocks widen global credit spreads, appreciate the dollar, and increase currency risk premia. In our model, higher uncertainty tightens intermediary constraints and lowers asset prices, reversing the counterfactual asset price increase in frictionless models. Because constraints make net worth especially valuable in bad times, risk premia respond strongly to uncertainty shocks. This interaction allows the model to match the credit spread, currency premium, and dollar responses in the data. |
| Keywords: | financial frictions; time-varying uncertainty; intermediary asset pricing |
| JEL: | E32 E44 F41 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103716 |
| By: | Benedikt Ballensiefen; Fabricius Somogyi; Hannah L Winterberg |
| Abstract: | We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. To empirically establish the relevance of survey-based expectations for currency flows, we leverage granular foreign exchange trading data and present three main findings. First, end-user investors increase their dollar purchases when they expect the US dollar to appreciate. Investment funds and non-dealer banks adjust their synthetic dollar borrowing in the FX swap market in response to forecasted changes in synthetic dollar funding costs. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, the predictive power of survey forecasts weakens when forecaster disagreement or uncertainty rises. Overall, our findings show that long-horizon expectations predict dollar demand across spot, forward, and swap currency markets. |
| Keywords: | Exchange rate expectations; dollar demand; currency flows; FX swaps; survey forecasts |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/186 |
| By: | Daniel Ostry (Bank of England and Centre for Macroeconomics); Simon Lloyd (Bank of England and Centre for Macroeconomics); Giancarlo Corsetti (European University Institute and CEPR) |
| Abstract: | This paper provides econometric evidence on how exchange rates respond to tariffs. We construct a new tariff-shock database, which captures tariff-related announcements, threats and implementations by the US, China, the euro area and Canada between 2018 and 2020, and in 2025. Our shock measure accounts for both the size of tariff rates and their economic relevance. We show that exchange rates react to US tariff shocks in systematically different ways depending on retaliation: the US dollar (USD) appreciates if the tariff is imposed unilaterally, but depreciates if other countries retaliate. This empirical pattern resonates with the predictions of recent open-macro models with dominant currency pricing. In light of our evidence and drawing on theory, we conclude that the USD depreciation following the US tariff announcement on 2 April 2025 was not surprising. The spike in long-maturity US Treasury yields was, however, more unprecedented. |
| Keywords: | Exchange rates;event study;retaliation;tariffs. |
| JEL: | F13 F31 F51 G15 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023261 |
| By: | Mateo Agustín Fernández (Department of Economics, Universidad de San Andrés) |
| Abstract: | This thesis studies how reserve accumulation stance shapes debt dynamics in emerging economies, using global financial shocks as a plausibly exogenous source of variation in external borrowing conditions. Using a quarterly panel of 38 emerging markets over 2000Q1–2023Q4, I classify reserve stance into Under, Adequate, and Over regimes based on the IMF’s Assessing Reserve Adequacy metric and exploit the Excess Bond Premium as a global risk shock. The empirical analysis combines state-dependent local projections, LP–2SLS specifications, and a sensitivity-based proxy approach. The reduced-form results show that reserve stance shapes the pass-through of global shocks to sovereign spreads: under-accumulation amplifies the spread response, whereas over-accumulation dampens it. The LP–2SLS estimates show that the short-run semi-elasticity of external debt to spreads is positive in the Adequate regime, with a positive Over-accumulation differential, indicating that attenuated pass-through to spreads is associated with stronger transmission to external debt. The sensitivity-based approach further shows that, in the benchmark exercise, countries whose spreads are more sensitive to the common shock exhibit more muted debt responses. However, once within-state heterogeneity is allowed, countries with higher spread sensitivity exhibit stronger debt responses in the Under and Adequate regimes, whereas in the Over regime the relationship turns negative. These results suggest that reserve accumulation affects debt dynamics by altering both the transmission of global shocks to borrowing costs and the subsequent debt adjustment. An extension to additional macroeconomic outcomes shows that reserve stance affects the composition of macroeconomic adjustment: the Over regime is associated with a substantially smaller depreciation and a more muted trade-balance adjustment, but also with a larger short-run contraction in real activity and a higher medium-horizon price-level response. |
| Keywords: | international reserves, sovereign spreads, external debt, local projections, emerging markets |
| JEL: | E44 F34 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:sad:ypaper:23 |
| By: | Kai Arvai; Nuno Coimbra; Marco Pinchetti |
| Abstract: | This paper investigates the determinants of international investors’ portfolio choices between gold and sovereign bonds in an environment shaped by economic and geopolitical shocks. We develop an endogenous portfolio choice model where reserve safety has a political dimension — sovereign bonds issued by the dominant reserve country are more liquid but exposed to the issuer’s sanctions authority, while gold offers sanctions protection at the cost of lower liquidity. Our model implies that US convenience yields fall during periods of high sanction risk, as safe-asset demand fragments along geopolitical lines. Empirically, periods of elevated geopolitical risk coincide with higher gold prices and 10-year Treasury yields. In such periods, the average composition of official reserves shifts toward gold, with countries less aligned with the US increasing their holdings to a greater extent. |
| JEL: | E41 F02 F33 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35669 |
| By: | Kevin Hjortshøj O'Rourke (CNRS and Sciences Po); Roger Vicquéry (Bank of England) |
| Abstract: | We present a new global index indicating how fixed the world’s exchange rates are. Our index measures the probability of two units of GDP, randomly selected anywhere in the world, of being involved in a fixed exchange rate arrangement. This approach is invariant to alternative classifications of the Eurozone and is able to account for both direct and indirect exchange rate linkages between countries. In contrast to the 'New Consensus' view, which posits a continuity in exchange rate arrangements from the Bretton Woods era to the present, our index restores the conventional account of international monetary history over the last 70 years. Our findings indicate that global exchange rate regimes are currently nearly three times as flexible as they were prior to the 1971 Nixon shock. Furthermore, our measure partially puts into perspective the view that dollar dominance is now stronger than ever: we find that global anchoring to the US dollar was significantly more prevalent during Bretton Woods, particularly when accounting for indirect links. |
| Keywords: | Fixed exchange rate regimes;Bretton Woods;Nixon Shock;anchor currencies;US dollar dominance |
| JEL: | E5 F3 F4 N2 |
| Date: | 2025–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023253 |
| By: | Zhengyang Jiang |
| Abstract: | Does financial opening necessarily lead to currency internationalization? To study the competition between incumbent and rising powers under financial interdependence, we develop a model of asset demand with microfounded network effects. Search frictions with currency-specialized intermediaries generate distinct notions of liquidity at asset-market and currency-area levels, which jointly shape the trajectory of currency competition. In the U.S.-China context, China at early stages of financial development benefits from pooling its assets with the dollar area, which reinforces the status quo. As China's financial markets deepen, RMB issuance allows China to internalize network effects and erode the dollar's dominance, triggering a discrete shift toward fragmentation. This transition is further shaped by sanctions, financial repression, and third-country responses, highlighting how financial interdependence transforms cooperation into rivalry in the evolution of the international financial order. |
| JEL: | E42 F34 G15 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35541 |
| By: | Jongrim Ha; Dohan Kim; M. Ayhan Kose; Francis E. Warnock |
| Abstract: | Identifying the impact of capital inflows on output is challenging because inflows are forward-looking and respond to expectations about future economic conditions. We develop a new measure of capital inflow shocks using a simple and broadly applicable expectations-based framework that isolates the unexpected component of inflows by purging movements predicted by professional forecasters’ expectations. Estimates using the new measure for 27 emerging market economies indicate that capital inflows have sizable expansionary effects on output, operating through stronger domestic consumption and investment and easier financing conditions. Additional analysis indicates that equity-type inflows generate greater and more persistent effects than debt-type inflows, while large inflow reversals result in more pronounced effects than comparable increases in inflows. These results are robust to a wide range of alternative specifications. |
| JEL: | E32 F32 F41 G11 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35716 |
| By: | Ambrogio Cesa-Bianchi (Bank of England); Andrea Ferrero (University of Oxford); Shangshang Li (University of Liverpool) |
| Abstract: | In response to an unanticipated monetary policy tightening in the US, the demand/financial channel of the international transmission of the shock dominates over the expenditure‑switching effect. For a typical small open economy with flexible exchange rates, credit spreads increase, while real GDP and exports fall despite a depreciation of the local currency. In an estimated two‑country open economy model, financial and pricing frictions that assign a prominent role to the global reserve currency are key to account for the empirical evidence. Model‑based counterfactual policy analysis suggests that, even in the presence of a global financial cycle, the exchange rate regime matters. The volatility of output and inflation is an increasing function of the weight associated to the stabilisation of the exchange rate in the monetary policy rule. The introduction of countercyclical policy instruments that target either domestic credit or capital flows dampens economic fluctuations. In a fixed exchange rate regime, either instrument can limit the negative spillovers of foreign monetary policy shocks on real economic activity, but not on inflation. |
| Keywords: | Exchange rates flexibility;currency invoicing;dilemma;expenditure‑switching;foreign exchange liabilities;global financial cycle;trilemma. |
| JEL: | E44 E58 F32 F42 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023263 |