Reserve composition
share of a category = category / total reserves
Total = foreign exchange + gold + SDRs + reserve position in the IMF
Rebalancing at a fixed total: target holding = target share x total
Any question on the composition of reserves or on dedollarisation. Compute the total first, and remember that a fixed total makes a target share a computable level.
- foreign exchange
- Typically around 80 per cent of the total, mostly dollars: the mark of a fiat standard
- SDRs
- The IMF's own reserve asset, a basket of major currencies
Misalignment against purchasing power parity
PPP rate = base rate x (home price index / foreign price index)
misalignment % = (market rate - PPP rate) / PPP rate
market rate above PPP => home currency UNDERvalued
market rate below PPP => home currency OVERvalued
Sizing the misalignment the deck complains about. Say that PPP is a long-run benchmark that ignores non-traded goods and productivity differences, so a gap is evidence rather than proof.
- base rate
- The rate in the year when the two price indices were equal
- direction check
- Faster home inflation means more home units per dollar, so the PPP rate must rise
Volatility, crudely measured
range % = (highest rate - lowest rate) / mean rate x 100
Putting a number on short-run exchange rate movement. Contrast it with the misalignment figure: volatility is hedgeable, a wrong level is not.
- range
- High minus low over the period
- mean
- The average of the observations, the denominator
Substitution account arithmetic
backing ratio = reserve assets / foreign-held claims
after converting C: new ratio = reserve assets / (claims - C)
To reach a target ratio r: C = claims - (reserve assets / r)
The SDR substitution account question. The reserve assets never change: the account works entirely on the denominator, which is why the interest and buyback questions killed it.
- C
- The amount of dollar claims converted into SDRs
- the two objections
- Who pays or earns interest on the converted SDRs, and when the United States buys the dollars back