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Do Sales of Foreign Exchange Reserves Lead to Currency Appreciation?

Authors

  • KATHRYN M.E. DOMINGUEZ,

  • RASMUS FATUM,

  • PAVEL VACEK


  • We thank the Czech National Bank, particularly former Governor Zdenek Tuma, for access to the proprietary official intraday reserve sales data and for invaluable discussions. We have also benefited greatly from discussions with Karel Bauer and Petr Frydrych of the Czech National Bank. The paper was presented at the ASSA meeting (Chicago), the Bank of Japan, the Federal Reserve Bank of St. Louis, and the IMF; we thank seminar participants as well as two anonymous referees and an editor of this journal for very helpful comments. Dominguez and Fatum are grateful to the International Policy Center at the Ford School of Public Policy and Social Sciences and Humanities Research Council of Canada (SSHRC), respectively, for financial support. Vacek gratefully acknowledges financial support from the Czech Science Foundation (grant no. P402/12/G097). Thomas Bridges and Brian Wojcik provided outstanding research assistance.

Abstract

We employ novel time-stamped reserve sales data, provided by the Czech National Bank (CNB), to carry out a time-series analysis of the exchange rate implications of Czech reserve sales aimed at mitigating valuation losses on Euro-denominated assets. The sales were explicitly not intended to influence the value of the koruna relative to the euro. The period under study includes a well-defined regime change in the CNB's approach to reserves sales, allowing us to address whether the manner in which the sales are carried out matters for their influence on the relative value of the domestic currency. We find little evidence that reserve sales influence the exchange rate when sales are carried out on a discretionary and relatively infrequent basis. However, when the sales are carried out daily, we find a statistically and economically significant appreciation of the domestic currency follows.

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