Official Reserves • Official (international) reserve assets : foreign assets held by central banks to cushion against financial instability – Assets include government bonds, currency, gold, and accounts at the International Monetary Fund – Official reserve assets owned by (sold to) foreign central banks are a credit (+) [sell of domestic assets] – Official reserve assets owned by (purchased by) the domestic central bank are a debit ( - ) [purchase of foreign assets]
CURRENT ACCOUNT Credit Exports of goods 1,459,667 Exports of services 752,412 Primary income receipts 801,923 Secondary income (current transfer) 128,172 Total Credit 3,142,174 Imports of goods 2,209,592 Imports of services 503,047 Primary income payments 621,333 Secondary income (current transfer 289,409 Total debit 3,623,381 Current Account Balance (CA) -481,207 Capital Account Balance (KA) -59 US Balance of Payments, 2016 US Bureau of Economic Analysis FINANCIAL ACCOUNT Net U.S. incurrence of liabilities excluding financial derivatives (net increase in liabilities / financial inflow (+)): credit 759,370 Direct investment liabilities 425,256 Portfolio investment liabilities 270,924 Other investment liabilities 63,190 Net U.S. acquisition of financial assets excluding financial derivatives (net increase in assets / financial outflow (+)): debit 330,956 Direct investment assets 347,528 Portfolio investment assets 20,682 Other investment assets -39,344 Reserve assets 2,090 Financial derivatives other than reserves (net) -21,951 Financial account Balance (FA) 406,463 Statistical discrepancy 74,803 Δ?? = −2,090
Official Reserves • We measure the change in the official reserves held by the CB of the country as: changes in “official reserves” ( ∆?? ) Δ?? = ?𝐴 + ?𝐴 no OT + 𝐾𝐴 + ??
Official Reserves • Δ?? > 0 ⇒ ?𝐴 + ?𝐴 > 0 – The central bank is investing abroad (e.g. accumulating foreign currency/assets) – This generates an outflow of capital • Δ?? < 0 ⇒ ?𝐴 + ?𝐴 < 0 – The CB is reducing the stock of foreign assets – Inflow of capital – The country is borrowing from abroad
Official Reserves: exchange rate regime • Floating vs fixed exchange rate : when the central bank does not participate (“intervene”) in the forex market ∆OR=0 – in this case we state that the country is on a “ purely floating exchange rate regime” • When ∆?? ≠ 0 the central bank is influencing the exchange rate which is therefore defined as being somewhat fixed or managed
Floating vs fixed exchange rate Swiss francs per euro Dollars per euro trying to “fix”, or “peg”
BoP: Example • An Italian firm imports a good from China (paying with a check) • The Chinese firm deposits your check in a EU bank Good ( current account, EU good import ) – €80 Bank deposit ( financial account, EU asset sale ) +€80