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External Shocks, Competitive Holding and Cooperation Strategy of Foreign Exchange Reserves

Wei Xiaoyun, Han Liyan


A country's holding strategy of foreign exchange reserves depends not only on their economic situation and macroeconomic policy, but also be interfered by holdings of other countries. The above phenomenon is known as Jones Effect or Bandwagon Effect. This paper will examine whether China has added to the race of foreign exchange reserves holding. We employ the Cournot model to develop the framework of cooperation and non-cooperation strategy of foreign exchange reserves holding. Finally we show the optimal size of foreign exchange reserves by numerical simulation which is supported by data from seven Asian emerging market countries. The results could provide a reference for government to promote the construction of foreign exchange reserves pool.


External shocks; foreign exchange reserves; competitive holding; cooperation strategy.

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