External debt currency denomination and the currency composition of foreign exchange reserves

This study examines the effect of external debt currency denomination on the currency composition of foreign exchange reserves (FXR) in 51 countries from 1999 to 2019. We employ a treatment effect model in which the central bank swap lines during the 2008 global financial crisis act as a plausibly exogenous shock. Our findings indicate that higher proportions of dollardenominated external debt led central banks to hold more US dollar in their FXR. The responsiveness of this relation diminishes in the presence of capital controls. Furthermore, we provide a theoretical model to demonstrate that the buffer stock role of FXR is a viable channel through which US dollar-denominated debt influences central banks' dollar FXR holdings.