https://doi.org/10.52903/wp2026369
DYNAMICS OF THE CURRENCY COMPOSITION OF CENTRAL BANK RESERVES
Deborah Gefang
Department of Economics, Leicester University
Stephen G. Hall
Department of Economics, Leicester University, Bank of Greece,
and University of St Andrews
George S. Tavlas
Bank of Greece and the Hoover Institution, Stanford University
ABSTRACT
We examine how macroeconomic and geopolitical developments in the United States, the euro area, and China affect the currency composition of central banks’ foreign exchange reserves. Using an unbalanced panel of reserve shares for 53 countries over 1999–2023, we estimate a constrained system of equations that explicitly imposes the adding-up restriction on reserve shares. The results indicate substantial persistence in reserve holdings and significant cross-currency dependence, supporting a system-wide dynamics of reserve composition. In the country fixed-effects specification (1) issuer economic size, (2) uncertainty, (3) sanctions, (4) trade linkages, and (5) issuer credibility are significantly associated with reserve allocation across currencies. With the inclusion of year fixed effects, the persistence and cross-currency dependence remain, while trade linkages and sanctions emerge as the most important determinants of reserve composition. The results highlight the importance of accounting for the compositional nature and interdependence of reserve shares when examining the determinants of global reserve holdings.
JEL-classifications: C32; E52; E58
Keywords: reserve currencies; U.S. dollar; determinants of international currencies; interdependence of currency composition
Acknowledgments: We thank Falk Laser, Alexander Mihailov, and Jan Weidner for generously providing the most up-to-date data and for their helpful discussions. We have also benefited from comments from Athanasions Lampousis and seminar participants at the 30th International Conference on Macroeconomic Analysis and International Finance held at the University of Crete in Rethymno, Crete, on May 27-30, 2026. We thank Elisavet Bosdelekidou and Maria Monopoli for research assistance. The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece or the Eurosystem.
Correspondence:
George Tavlas
Bank of Greece,
21 E. Venizelos Ave., Athens, 102 50, Greece
Tel. no. +30 210 320 2370
email: gtavlas@bankofgreece.gr