US Monetary Spillovers, Foreign Exchange, and Gold Reserves at Times of Geopolitical Fragmentation -- by Joshua Aizenman, Jamel Saadaoui, Gazi Salah Uddin, Naoki Yago

This paper studies the role of foreign exchange and gold reserves in mitigating the US monetary policy spillovers to exchange rates at times of geopolitical fragmentation and de-dollarization. US dollar reserves mitigate depreciation driven by US monetary tightening, while non-dollar reserves do not. Gold reserves are also associated with smaller exchange-rate responses, though less strongly than dollar reserves, suggesting novel complementarity between dollar and gold reserves. Moreover, the estimated effects of dollar and gold reserves are concentrated in countries without swap and repo lines. These findings are consistent with recent large-scale purchases and sales of gold reserves by emerging economies amid sanctions-related restrictions and geopolitical concerns about access to dollar liquidity. Our results suggest that not only the aggregate volume but also the composition of foreign exchange and gold reserves and access to dollar liquidity facilities are empirically relevant for exchange-rate responses to US monetary shocks. Finally, we exploit cross-country heterogeneity and show that countries with large dollar exposure exhibit smaller exchange-rate responses when dollar and gold reserve holdings are larger.