Mr. Marcos d Chamon, Mr. David J Hofman, Mr. Nicolas E Magud, and Alejandro M. Werner
Foreign exchange intervention is widely used as a policy tool, particularly in
emerging markets, but many facets of this tool remain limited, especially in
the context of flexible exchange rate regimes. The Latin American experience
can be informative because some of its largest countries adopted floating
exchange rate regimes and inflation targeting while continuing to intervene
in foreign exchange markets.
This edited volume reviews detailed accounts from several Latin American
countries’ central banks, and it provides insight into how and with what aim
many interventions were decided and implemented. This book documents
the effectiveness of intervention and pays special attention to the role of
foreign exchange intervention policy within inflation-targeting monetary
frameworks. The main lesson from Latin America’s foreign exchange
interventions, in the context of inflation targeting, is that the region has had
a considerable degree of success. Transparency and a clear communication
policy have been key. For economies that are not highly dollarized, rules-based
intervention helped contain financial instability and build international
reserves while preserving inflation targets. The Latin American experience can
help other countries in the design and implementation of their policies.
This update of the guidelines published in 2001 sets forth the underlying framework for
the Reserves Data Template and provides operational advice for its use. The updated version
also includes three new appendices aimed at assisting member countries in reporting the required data.
A quantitative framework is developed to bring forward the insurance motive of holding international reserves. The insurance value of reserves is quantified as the market price of an equivalent option that provides the same insurance coverage as the reserves. This quantitative framework is applied to calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund) and to analyzing one leg of an optimal reserve-holding decision.
International financial crises in the late 1990s revealed that deficiencies in countries’ international reserves and related information made it difficult to anticipate and respond to crises by obscuring financial weaknesses and imbalances. This volume sets forth an innovative framework to assess countries’ international reserves and foreign currency liquidity. The framework takes account of official balance sheet and off-balance-sheet financial activities, future and potential demand for foreign exchange to meet official obligations, the availability of official foreign currency assets to meet such demand, and official risk exposure to exchange rate fluctuations. This work clarifies what international reserves are, and how international reserves and related information should be strengthened to promote informed decision making in the public and private sectors, thereby helping improve the functioning of global financial markets.
This paper describes the structure of the world gold market, its sources of supply and demand, and how it functions. The market has three principal functions in three major locations: the New York futures market speculates on spot prices, which are largely determined in London, whereas physical gold is in large part shipped through Zurich. The market is dominated by large suppliers and gold holders, including monetary authorities. Some unique characteristics of the gold market ensure confidentiality, and as a result, there are gaps in existing knowledge and data. The paper identifies and attempts to fill these gaps.
1. International financial crises in the late 1990s underscored the importance of disseminating comprehensive information on countries’ international reserves and foreign currency liquidity1 on a timely basis. Deficiencies in such information have made it difficult to anticipate and respond to crises by obscuring financial weaknesses and imbalances. (See Box 1.1) Moreover, both the complexity and the importance of such information have increased as a result of the ongoing globalization of financial markets and financial innovations. The international financial activities2 that countries’ central banks and government entities undertake now occur in myriad forms, involve multiple domestic and foreign entities, and span locations around the globe. To assess countries’ foreign currency liquidity requires supplementing traditional data on international reserves that cover largely cross-border and balance-sheet activities with those on foreign currency positions and off-balance-sheet activities.
58. This chapter provides guidelines to assist countries in reporting data on the authorities’ foreign currency resources (comprising reserve assets and other foreign currency assets) in Section I of the template. Items I.A.(1) through I.A.(5) are used to report information on reserve assets and item I.B., on other foreign currency assets. All items in Section I refer to outstanding assets (stock) on the reference date. As noted in para. 42, to facilitate liquidity analysis, it is recommended that information on special features of the reporting country’s reserves management policy and major sources of funds for reserve assets and other foreign currency assets be described in country notes accompanying the template data. To enhance data transparency, it is also important to indicate in country notes specific changes in the reporting country’s exchange rate arrangements (for example, the implementation of dollarization) and their impact on the level of the country’s reserve assets.
138. Section II of the template is used to report the authorities’ predetermined short-term net drains on foreign currency assets. “Predetermined” drains are the known or scheduled contractual obligations in foreign currencies. Contractual obligations of the authorities can arise from on-balance-sheet and off-balance-sheet activities. On-balance-sheet obligations include predetermined payments of principal and interest associated with loans and securities. (See also footnote 6 of the data template.) Off-balance-sheet activities that give rise to predetermined flows of foreign currency include commitments in forwards, swaps, and futures contracts.
180. Section III of the template covers contingent short-term net drains on foreign currency resources. As discussed in Chapter 3, net drains refer to outflows net of inflows. Contingent inflows and outflows simply refer to contractual obligations that give rise to potential or possible future additions or depletions of foreign currency assets. Contingent drains are by definition off-balance-sheet activities, since only actual assets and liabilities are to be reflected on balance sheets. Section III of the template differs from Section II because foreign currency flows to be reported in Section III are contingent upon exogenous events. As with predetermined foreign currency flows covered in Section II of the template, contingent flows can arise from positions with residents and nonresidents.
236. Section IV of the template provides supplementary information covering (1) positions and flows not disclosed in Sections I—III but deemed relevant for assessing the authorities’ reserves and foreign currency liquidity positions and risk exposure in foreign exchange; (2) additional details on positions and flows disclosed in Sections I—III; and (3) positions and flows according to a breakdown or valuation criteria different from those found in Sections I—III.