Stability or Upheaval? The Currency Composition of International Reserves in the Long Run
by Barry Eichengreen, Livia Chitu and Arnaud Mehl
This project analyzes how the role of different national currencies as international reserves was affected by the shift from fixed to flexible exchange rates. The authors extend data on the currency composition of foreign reserves backward and forward to investigate whether there was a shift in the determinants of the currency composition of international reserves around the breakdown of Bretton Woods. They find that inertia and policy-credibility effects in international reserve currency choice have become stronger post-Bretton Woods, while network effects appear to have weakened. They show that negative policy interventions designed to discourage international use of currency have been more effective than positive interventions to encourage its use. These findings speak to the prospects of currencies like the euro and the renminbi seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it.