“Large foreign currency reserve balances may not be needed to maintain an effective exchange rate policy over the medium and long term, according to a recent study by staff at the Federal Reserve Bank of New York. In their study Do Industrialized Countries Hold the Right Foreign Exchange Reserves? New York Fed economists Linda Goldberg, Cindy Hull, and Sarah Stein note that the need for foreign currency reserves has been an important tenet of the post Bretton-Woods international financial order. Recent growth in the reserve balances of industrialized countries, however, raises questions about what level and composition of reserves are “right” for these countries. According to the authors, countries hold reserves as a tool for intervening in foreign exchange markets to potentially stabilize the value of their currency and as insurance against disruptions to capital market access. The authors note, however, that the evidence is mixed on whether foreign exchange interventions can influence exchange rate levels for more than a short period of time. In addition, authoritative metrics are lacking on the level of reserves needed for such interventions. If interventions achieve their effects on exchange rates by signaling the intentions of policymakers, the authors argue, then the purchase or sale of a small amount of reserves might suffice to send the appropriate message. Moreover, while reserves may provide insurance against a loss of access to the capital markets, countries may have other ways to alleviate funding pressures.”