Business Intelligence

Global Impact Of A Shift In Foreign Reserves To Euro

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Executive Summary

This paper uses QUEST III, a multi-region DSGE model, to study the macroeconomic effects of a gradual equalization of official foreign reserves between dollars and euros. The authors simulate a scenario of a shift in the composition of foreign reserves holdings from the present ratio of 65 percent dollars and 25 percent euros to equal 45 percent shares over a 10 years period. They assume imperfect substitutability between financial assets to allow this shift to have real effects. The simulations point towards small real effects due to the reduction in real interest rates resulting from this shift in official holdings.

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