“Do Central Banks Rebalance Their Currency Shares?”

Some do; some don’t. Now published, an article in Journal of International Money and Finance (pre-proof) by me, Hiro Ito,  and Robert McCauley answering this question. From the abstract:

Do central banks rebalance their currency shares? The answer matters because the dollar’s predominant role in large official reserve holdings means that widespread rebalancing requires central banks to buy (sell) a depreciating (appreciating) dollar, stabilizing its value against other major currencies. We hypothesize that larger reserve holdings have led central banks to approach their investment more systematically and to make rebalancing in the face of exchange rate changes the norm. We illustrate the choice with two polar case studies: the US clearly does not rebalance its small FX reserves; Switzerland does rebalance its very large reserves, so that changes in exchange rates do not move its currency allocation. Our hypothesis finds partial support in global aggregated data. They reject both no rebalancing and full rebalancing and point to emerging market economies as the source of the aggregate result. We also test for rebalancing with panel data and find that our sample economies on average again behave in intermediate fashion, partially but not fully rebalancing. However, when observations are weighted by the size of reserves, the panel analysis finds full rebalancing. A variety of control variables and splits of the panel sample do not alter the thrust of these findings. Central banks rebalance their FX reserves extensively but not uniformly.

The most substantive innovation is the use of panel data with observations on how individual central banks and government agencies that hold foreign exchange reserves manage reserve composition. This is a unique data set, and represents an expansion of the data set compiled and examined in Ito and McCauley (2020), discussed in this post (the expansion is from 58 to 74 countries, 1999-2018 to 1998-2020).

Third, panel analysis of more than 70 economies also finds that in aggregate central banks partially rebalance. When advanced and emerging markets are separately analysed, their behavior does not differ substantially.

Fourth, when we weight the panel observations by the scale of reserves, full rebalancing is the result. From this perspective the Swiss approach is more typical of big reserve holders than the US approach. This finding is consistent with large reserve holders making reserve management more like private portfolio management.

Fifth, rapidly growing reserves are associated with a higher dollar share. We interpret this as reflecting the dollar as dominant (“vehicle”) currency in the FX market: most central banks buy dollars and then diversify into their target currencies with a lag. By contrast, there is little evidence that financial market volatility affects rebalancing.

Taking these altogether, the strong suggestion is the association of reserve size and rebalancing. In the case studies, the Swiss have large reserves and rebalance; the US, modest reserves and do not rebalance. In the aggregate data, rebalancing seems more characteristic of [Emerging Market Economies] EMEs, some of whom hold very large reserves. In the panel data, rebalancing is the norm when observations are weighted by reserve size in relation to GDP.

Stratifying the sample, we also find that closed-to-trade economies rebalance, while open-to-trade do not; commodity exporters tend to rebalance more than non-commodity exporters (the difference is not statistically significant in the latter case).

Some of these estimates are summarized in Figure 1 (higher values mean no rebalancing, lower values mean rebalancing).

Figure 1: Regression coefficient of change in dollar share response to valuation change in dollar share. Source: Chinn, Ito, and McCauley (2021), Tables 4, 5.

What are the macroeconomic implications? If enough central banks with enough reserves adjust in response to exchange rate changes, then there’s a possibility of effects on dollar asset values, like bond yields and the dollar itself. A back of the envelope calculation:

A 10% depreciation of the dollar could give rise to $150-$200 billion in dollar purchases. The implication for the foreign demand for US Treasury securities follows immediately.

The paper is also available as NBER working paper no. 29190. It can also be downloaded from the Global Development Policy Center at BU, here.

The data underlying the paper are available here (sans proprietary data).

45 thoughts on ““Do Central Banks Rebalance Their Currency Shares?”

  1. Moses Herzog

    Really think this paper will make some more noise that it has initially, because other researchers will use this to progress their own work/questions. Hats off to the three gentleman on their arduous work finding the various central bank numbers. Of course i am biased because, as everybody here knows, I’m a Menzie Chinn fanboy of the great unwashed masses. Gosh darn it.

    Reply
  2. ltr

    Really nice paper.

    “A 10% depreciation of the dollar could give rise to $150-$200 billion in dollar purchases. The implication for the foreign demand for US Treasury securities follows immediately.”

    Now to look at what this may have meant in the wake of the Plaza Accord, September 1985.

    Reply
  3. rsm

    Do currency swap lines mean this entire paper is a trivial footnote to how exchange rates are really hedged? Did they find noise, and spin it into a cherry-picked story? What does it mean, to depreciate the dollar? Do currency swaps dwarf any tiny effect they statistically fished for?

    Reply
    1. Moses Herzog

      ^
      ^
      I
      I
      I

      Playing the role of Floyd R Turbo tonight.

      @ rsm: Nothing I said to you before means anything to you at all does it?? Uncle Moses being an absolute moron again by taking sympathy for people.

      Reply
      1. Barkley Rosser

        Moses,

        Bur he noticed that you said this paper would “make noise,” and in his view economists killed his brother by spouting “noise” statistics without also reporting standard errors, even though in the case of true statistical noise that has no underlying probability distribution, there are no standard errors.

        Reply
        1. Moses Herzog

          Yeah, well…… I 100% agree with you on your math statements there. You know I actually still “feel” for the guy losing his brother or people who felt some major loss. I just feel a little disappointed is all. The empathetic way doesn’t appear to be working. Try throwing a small tub of cold water on him would you?? I just can’t do much more than feel disappointment at this point. It’s the slacker in me I guess. Really I just feel similar to our friend JohnH he’s better than this, we just have to appeal to that good part of him, somewhere….. inside the maze.

          Reply
          1. Barkley Rosser

            Moses,

            I largely agree and sympathize with your disappointment. It is too bad rsm did not take you up on your empathic advice and seems to be stuck in his rut, or lane, with this obsessive and misguided story.. Maybe he is afraid that if he changes his lane a house will fall on his head.

    2. Macroduck

      No.
      No.
      When discussing currencies, “depreciate” is properly intransitive. You have tried to use it in a transitive manner, reflecting a poor understanding of the matter at hand.
      No.

      Glad I could clear all that up for you.

      Reply
    1. T. Shaw

      Truth!

      Apparently, the WTA has ‘them’ the size of grapefruits compared to the entire NBA and all the outsized men running around in arenas in their underwear.

      Say her name, “Peng Shuai.”

      Reply
      1. Moses Herzog

        @ T. Shaw
        You’re intentionally trying to get me to second guess myself aren’t you?? Is there a “block” button for when neanderthals “agree” with you on this blog???

        Reply
    2. baffling

      kanter is not really playing fair with this criticism. there is truth to it. but kanter is taking a stand with zero chance of repercussion or loss. there is zero loss or risk involved in kanter’s stance. on the other hand, lebron has hundreds of millions of dollars at stake. he is more measured for a reason. he can also be more impactful, but not in an irrational way. i find it interesting how cavalier people can be with other’s money. james has had an influence on social justice issues. more so than even michael jordan, who has historically been rather quiet there.

      Reply
    1. paddy kivlin

      interesting that the research in the linked article did not get to moderna’s 2013 “grant” from defense advanced research programs admin (darpa) . to work on messenger rna (mrna). dod is notoriously bad at getting any rights to patents or ‘free’ access to data from r&d efforts.

      https://investors.modernatx.com/news-releases/news-release-details/darpa-awards-moderna-therapeutics-grant-25-million-develop

      “This grant is part of a DARPA program called ADEPT: PROTECT (Autonomous Diagnostics to Enable Prevention and Therapeutics: Prophylactic Options to Environmental and Contagious Threats). ”

      adept link: https://www.darpa.mil/program/autonomous-diagnostics-to-enable-prevention-and-therapeutics

      the mrna jabs succeeded in meeting the adept requirement of ”temporary’.

      the idea was inoculate soldiers so they had temporary “protection” from known antigens, the pandemic prevention platform study was to make the mrna cocktail rapidly available….

      it does not look like they moderna, pfizer, etc are responding to delta variant i presume darpa failed at rapid pandemic prevention goals…..

      is mrna any better than tang?

      Reply
      1. baffling

        “dod is notoriously bad at getting any rights to patents or ‘free’ access to data from r&d efforts.”
        well, that is not why darpa and its derivatives were created to begin with. it is a high risk, high reward system. but darpa is not an angel investor.

        “it does not look like they moderna, pfizer, etc are responding to delta variant”
        this is patently false. this is the type of misinformation that should result in banning from social media sites. you should not be free to propagate intentional lies.

        Reply
  4. ltr

    https://www.nytimes.com/2021/01/09/world/asia/india-farmers-protest.html

    January 9, 2021

    In the Cold and Rain, India’s Farmers Press Their Stand Against Modi
    Protesters have created camps around Delhi that are virtual cities unto themselves, using donations and their own organizational skills to help their battle against new government farm policies.
    By Mujib Mashal and Karan Deep Singh
    Photographs by Saumya Khandelwal

    NEW DELHI — Under a rain-slick tarpaulin, half a dozen elderly women bake roti on a wood-fired griddle — flattening dough, flipping browned bread from dawn until the sun retreats into Delhi’s evening smoke. Anyone who walks in gets served rice and cooked vegetables and, to wash it down, a cumin-flavored yogurt drink.

    Across the road, Jagjeet Singh, a burly man with a large fanny pack and a light purple turban, churns a hefty pot of milk coffee from 5 a.m. to 5 p.m. In the evenings, Mr. Singh switches to hot milk spiced with turmeric and cloves — good for the cold, good for the day’s exhaustion. He goes through about 260 gallons of milk daily.

    “Now this is coffee,” he said, as his pot came to a boil and he leaned over it for a sniff. “You can even smell it from a helicopter!”

    Music, games and free stuff, from fried snacks to thermal underwear to bottles of almond hair oil, can be found at every corner. But the scenes stretching for miles around the Indian capital don’t come from a fair. They make up one of the largest sustained protests the country has seen in decades, persisting through steady rains and dozens of deaths that farmers and the Indian media have attributed to the weather, illness or suicide.

    For six weeks now, tens of thousands of farmers have choked the city’s four main entry points. They are challenging Prime Minister Narendra Modi, who has crushed all other opposition and stands as the country’s dominant political force, over his effort to reshape how farming in India has been done for decades. The protests have snarled business across northern India at a time when the country’s economy is already ailing.

    The protesters are demanding that Mr. Modi repeal recent farming laws that would minimize the government’s role in agriculture and open more space for private investors. The government says the new laws will unshackle farmers and private investment, bringing growth. Farmers are skeptical, fearing that the removal of state protections they already consider insufficient will leave them at the mercy of corporate greed.

    “They sold everything else. Only the farmers are left,” said 18-year old Ajay Veer Singh, who has been at the protest with his 67-year-old grandfather since it began in November. “Now they want to sell the farmers to their corporate friends too.” …

    Reply
    1. ltr

      https://www.nytimes.com/2021/11/18/world/asia/india-farmers-modi.html

      November 18, 2021

      In Rare Show of Weakness, Modi Bows to India’s Farmers
      A bungled response to Covid and a struggling economy have hurt his party’s standing, leaving it vulnerable to a well-organized protest movement.
      By Emily Schmall, Karan Deep Singh and Sameer Yasir

      NEW DELHI — Narendra Modi has dominated politics in India for seven years. With broad public support and big majorities in Parliament, the prime minister has pushed through dramatic and sometimes damaging policies. His government has fiercely advocated a Hindu-focused nationalist agenda and used increasingly heavy-handed tactics to silence critics, with little effective opposition.

      On Friday, with a rare retreat, Mr. Modi suddenly doesn’t look quite as dominant.

      Mr. Modi said that his government would repeal three farm laws aimed at fixing the country’s struggling agricultural sector, in a surprise concession to yearlong protests by farmers worried that the overhauls would ruin their livelihoods.

      The government, he said in a televised address, “will begin the procedure at the Parliament session that begins this month. I urge the protesting farmers to return home to their families, and let’s start afresh.”

      Mr. Modi timed his announcement for Guru Nanak Jayanti, a holiday celebrated by Sikhs, in a nod to India’s minority Sikh community, who make up the base of the protest.

      “Today, I beg the forgiveness of my countrymen and say with a pure heart and honest mind that perhaps there was some shortcoming,” he said.

      The speech stunned Indians accustomed to Mr. Modi’s usual stance as a muscular leader impervious to criticism. But it signaled that his standing has weakened amid a variety of problems, including a disastrous response to a second wave of the coronavirus and a struggling economy.

      “Modi’s image as a tough, no-nonsense prime minister has suffered a huge dent,” said Yashwant Sinha, a former finance minister who quit Mr. Modi’s party in 2018….

      Reply
  5. ltr

    Martin Luther King and Muhammad Ali were demeaned for failing to support a war on the people of Vietnam. Now another brilliant African-American athlete and social model is being demeaned for failing to support a false campaign against the people of China.

    Reply
    1. pgl

      Excuse me but if Martin Luther King and Muhammad Ali were alive today – they would be demanding that the PRC treat Peng Shuai properly. Your comment here has insulted two of my most cherished heroes. Do not got there – ever!

      Reply
      1. Macroduck

        Is it racist to enlist the legacy of anti-racists in support of a racist regime? Kinda seems like it is.

        ltr, I think your racist asters would be better served if you would stop writing about racism.

        Reply
    2. pgl

      Of course you may be calling false the reality of forced labor in China, Uyghurs and Tibet. MLK and Ali would dismiss your lies and demand these workers be treated properly. Stop insulting MLK in defense of your favorite tyrant.

      Reply
        1. Moses Herzog

          Arguably it’s all of China. But as I have stated before, there’s people there I deeply care for (even though I’ve lost contact) and I have tons of mixed feelings on this topic. My self-centric thoughts really have no bearing on the topic. Just saying……… and on electronics, computers, it gets challenging to avois, and this gets back to how much “free trade” hurts your resident country when you can’t even function in society without buying immoral Xi JInping ran products.

          Reply
  6. ltr

    https://kinginstitute.stanford.edu/king-papers/documents/beyond-vietnam

    April 4, 1967

    Beyond Vietnam
    By Martin Luther King

    Riverside Church, New York City

    Martin Luther King and Muhammad Ali were demeaned for failing to support a war on the people of Vietnam. Now another brilliant African-American athlete and social model is being demeaned for failing to support a false campaign against the people of China.

    [ A perfect comment, which I am proud to have made. ]

    Reply
    1. pgl

      A disgusting comment. The Vietnam War was a horrible mistake. But your defense of China’s abuse of its workers is just sick. Trying to bring the good name of MLK into your sick defense of a tyrant is the most pathetically disgusting thing I have ever seen on the internet. Stop this garbage now.

      Reply
    2. Macroduck

      In 1979, China attacked Vietnam because Vietnam opposed the Kmer Rouge, which was among the most murderous regimes in history. China, seeing nothing wrong with political murder on a massive scale, backed the Kmer Rouge.

      The Kmer Rouge regime fell, so naturally China declared victory. Kinda like declaring that Xi is as historically important as Mao. All revisionism is good revisionism?

      Now ltr invokes King’s opposition to the U.S. war with Vietnam as somehow support for today’s racist Chinese regime. ltr’s masters must really have their knickers in a twist.

      Reply
  7. ltr

    http://www.news.cn/english/2021-10/31/c_1310281523.htm

    October 30, 2021

    Harvesting the truth: Why Xinjiang’s cotton fields offer more than warmth

    — The cotton harvest season in Xinjiang, China’s largest cotton-producing region, will last until mid-November this year, with the output expected to reach 5.2 million tonnes.
    — The region has contributed nearly 90 percent of China’s cotton production capacity and about 20 percent of the global cotton production.
    — This year, more than 70 percent of the 2.48 million hectares of cotton fields in Xinjiang are harvested mechanically.

    By Xuan Liqi, Li Zhihao and Hu Huhu

    URUMQI — In four days, Lu Gaolin, a cotton farmer in northwest China’s Xinjiang Uygur Autonomous Region, completely finished harvesting his 64-hectare cotton field thanks to a gigantic green machine.

    The cotton picker is way more efficient than manual labor. “It used to take seven or eight workers over two months to complete the job of manually picking cotton,” he said.

    The cotton harvest season in Xinjiang, China’s largest cotton-producing region, will last until mid-November this year, with the output expected to reach 5.2 million tonnes. The region has contributed nearly 90 percent of China’s cotton production capacity and about 20 percent of the global cotton production.

    RUMOR MILL KEEPS RUNNING

    Resistant to drought and sandstorms, cotton is an indispensable crop for the farmers’ livelihood in Xinjiang. In their eyes, the rumors about “forced labor” in Xinjiang are extremely absurd.

    Arkin Rehim, a cotton farmer in the region’s Yuli County, has a great sense of fondness for cotton because cotton helps his family live the happy life they dreamed of.

    “We will never allow anyone to smear Xinjiang or defile the cotton we have planted,” he said. “I have confidence in Xinjiang cotton and will never give up planting it because of rumors.”

    For Xinjiang farmers, cotton-picking used to be an exhausting job. “We even worked until one or two o’clock each night during the harvest season,” Lu said.

    However, since manual cotton-picking became a thing of the past as early as 2014 in Shawan City, Lu’s hometown, farmers there have already been free from the arduous physical labor. This year, more than 70 percent of the 2.48 million hectares of cotton fields in Xinjiang are harvested mechanically.

    Presently, the whole process of planting and harvesting has been mechanized on more than 90 percent of cotton fields in northern Xinjiang. The mechanization rate of cotton picking has reached 40 percent and is still rising in the region’s southern part.

    Workers of all ethnic groups in Xinjiang always choose jobs of their own volition, and there is no coercion of any kind, said a white paper issued by the State Council Information Office.

    GROWING PROSPERITY

    Mijit Bakri, a cotton farmer in Bachu County, could barely feed his family of six in the past 20 years with a 2-hectare cotton field. Now he and his family have bid farewell to poverty….

    Reply
    1. ltr

      http://www.news.cn/english/2021-10/13/c_1310242475.htm

      October 13, 2021

      Technology boosts high-quality agriculture development in Xinjiang

      URUMQI — When the cotton harvest season started in October, the vast cotton fields in northwest China’s Xinjiang Uygur Autonomous Region saw roaring cotton-picking machinery instead of cotton farmers.

      Thanks to the machinery, Dilshat Memet, a cotton farmer in Yuli County, Bayingolin Mongolian Autonomous Prefecture, completed cotton picking in just one day. But in the past, he would be busy collecting cotton all through the harvest season.

      “The high-efficiency cotton picker can handle the workload of several hundred people. For generations, my family used to harvest cotton by hand and traditional implements,” Dilshat Memet said.

      Unlike his father, Dilshat Memet began to use cotton pickers several years ago. The great convenience of mechanical operation compelled him and his partners to set up an agricultural company, introducing types of agricultural machinery like cotton pickers and drone sprayers and providing services for farmers in need….

      Reply
      1. Barkley Rosser

        ltr,

        What on earth does mechanizing cotton production in Xinjiang have to do with whether or not large numbers of people in the province are being put into camps and sterilized? And who is this Black American athlete you are comparing to MLK for supposedly being willing to go along with the PRC propaganda campaign to downplay what is going on with this sort of dreck about how good the cotton pickers still employed in picking cotton have it now that most of the picking is being done mechanically? When that happened in the US South it set off a major migration wave to northern cities by the laid off Black cotton pickers.

        Reply
      2. pgl

        “When the cotton harvest season started in October, the vast cotton fields in northwest China’s Xinjiang Uygur Autonomous Region saw roaring cotton-picking machinery instead of cotton farmers.”

        Another account of what the Old South looked like. I guess you are also denying the 1619 Project!

        Reply
    2. Macroduck

      When ltr is called out for her most ridiculous, villainous propaganda, she then posts article after article of state-sanctioned drivel to hide her crimes against truth.

      Meanwhile ignoring Menzie’s request that commenters not post the full text of articles. But then, the demands of ltr’s masters matter more than what Menzie wants, right? He’s merely our host.

      Reply
    3. pgl

      Wow – this could describe the Old South in the 1850’s. Of course the Old South had slave labor. I sort of noted your nice little spin here never mentioned the conditions the workers had to endure in China. Which of course is the whole point you either duck or lie about.

      Reply
  8. ltr

    Martin Luther King and Muhammad Ali were demeaned for failing to support a war on the people of Vietnam. Now another brilliant African-American athlete and social model is being demeaned for failing to support a false campaign against the people of China.

    [ Though I am a timid person, and really prefer to be so, when I am confronted by false, prejudiced attempts to demean 1.4 billion people I have no choice but to respond. Fortunately, I have the perfect comparison or analogy in looking to the courageous stances of Martin Luther King and Muhammad Ali.

    I may be frightened by the personal attacks, but I am thinking and writing on behalf of people. ]

    Reply
    1. ltr

      https://newsus.cgtn.com/news/2021-03-13/64-countries-call-for-stopping-politicization-of-human-rights–YAnYBd1wo8/index.html

      March 13, 2021

      64 countries call for stopping politicization of human rights

      Madam President,

      I have the honor to speak on behalf of 64 countries.

      We maintain that all sides should promote and protect human rights through constructive dialogue and cooperation and firmly oppose politicization of human rights and double standards.

      We commend the people-center philosophy that the Chinese government pursues and achievements that have been made in its human rights cause. Xinjiang is an inseparable part of China. We urge the relevant sides to abide by the purposes and principles of the United Nations Charter, stop interfering in China’s internal affairs by manipulating Xinjiang related issues, refrain from making unfounded allegations against China out of political motivations and curbing the development of developing countries under the pretext of human rights.

      Thank you, Madam President.

      Reply
    2. Menzie Chinn Post author

      ltr: If you are propounding a certain point anonymously, and commenting with full articles lock-stock-and-barrel articles from a state-run organ, then criticisms of your comments and your conduct online should not be taken as invalid criticisms. As it is, you have never responded, to my knowledge, in a meaningful way to assertions of state-implemented repression of the Uighurs and other ethnic minorities.

      Reply
      1. ltr

        I only post portions of articles, and the articles I post are precisely referenced and completely authoritative and truthful and always entirely meaningful and germane to my thinking. I am not about to ever apologize for being entirely truthful nor for defending truth.

        I do appreciate your fine comments and am entirely grateful for them.

        Reply
        1. macroduck

          Well then, apologize. Because you have not been truthful, as for instance here:

          “…the articles I post are precisely referenced and completely authoritative and truthful and always entirely meaningful…”

          Where you write “authoritative” you would more truthfully write “authoritarian”. Precise referencing of propaganda is nothing to brag about. “Truthful” is exactly what you qnd ye article you post are not. You are an apologist for torture, human rights abuses and racism. And then you whine about being called out.

          Has China become nothing more than a culture of whiny murderers under Xi?

          Reply
        2. baffling

          “and the articles I post are precisely referenced and completely authoritative and truthful”
          no. you post articles from the propaganda arm of the ccp. this is no secret. these sites you reference are not free media sites. they are websites run by the chinese communist party. to argue these sites are truthful is flat out misinformation. they are propaganda mills.

          Reply
      2. ltr

        Actually, for all my limitations, I have commented superbly, in trying to properly present a view of the humaneness and decency and peacefulness and creativity of 1.4 billion people. I am so proud to tell of the accomplishments of the 1.4 billion. I will proudly continue to tell of the 1.4 billion.

        WEB Du Bois needed to tell of the splendid “Souls of Black Folk.” I could never be so eloquent, but I will tell what I can of the accomplishments of 1.4 billion Chinese.

        Thank you so dearly for your understanding.

        Reply
    3. pgl

      Personal attacks? You are insulting MLK and Ali with your garbage. And now you whine that people are calling you out? Go away as you are nothing more than a troll.

      Reply

Leave a Reply

Your email address will not be published.