Exchange Rate Volatility and Reserves Transparency
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Exchange Rate Volatility and Reserves Transparency JOHN CADY and JESUS GONZALEZ-GARCIA The effects of the adoption of the IMF’s International Reserves and Foreign Currency Liquidity Data Template on exchange rate volatility are investigated for 48 countries using panel data models and quarterly data from 1991 to 2005. In a model featuring significant relationships between nominal exchange rate volatility and fundamental macroeconomic variables, we find that the adoption of the reserves data dissemination standard is associated with a 20 percent decrease in volatility. Furthermore, adoption of the standard is also associated with changes in the relationships between exchange rate volatility and both indebtedness and reserve adequacy indicators. [JEL F31, F33, G14] IMF Staff Papers (2007) 54, 741–754. doi:10.1057/palgrave.imfsp.9450025
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he financial crises of the 1990s revealed a need for the dissemination of more comprehensive data on foreign currency liquidity positions to help prevent similar crises. In 1998, the IMF began working on initiatives in this area in collaboration with working groups of the Group of 10 (G-10) and the Group of 22 (G-22). The resulting International Reserves and Foreign Currency Liquidity Data Template (Reserves Template) became a prescribed element of the IMF’s Special Data Dissemination Standard (SDDS). Data reporting under this initiative began in June 1999, and after a short transition period, SDDS subscribers were required to observe the standard as of April 2000. The aims of introducing the Reserves Template extended beyond improving the frequency and timeliness of data dissemination on official
John Cady and Jesus Gonzalez-Garcia are senior economists from the IMF’s Statistics Department. The authors are grateful to William Alexander for suggesting this topic, and to IMF colleagues and an anonymous referee for their helpful comments and suggestions.
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John Cady and Jesus Gonzalez-Garcia
reserve assets. Rather, the Reserves Template was intended to provide market participants with new data on foreign currency liabilities that, together with more complete information on foreign currency assets, would provide a more complete picture of national authorities’ foreign currency liquidity positions. Under the new standard, detailed data dissemination is required on the following elements of the foreign currency liquidity position: official reserve assets, other foreign currency assets, and predetermined and contingent short-term inflows and outflows of foreign currency. In addition, subscribers are encouraged to report supplementary information that they deem relevant, including the currency composition of reserves (see Kester, 2001). Box 1 illustrates the type of new information disseminated via the Reserves Template, focusing on official releases by Canada and three other countries announcing their adoption of the new standard. Both the SDDS initiative at a general level and the Reserves Template were aimed at increasing transparency and promoting the efficient functioning of markets
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