Exchange Rate Implications of Reserve Changes: How Non-EZ European Countries Fared during the Great Recession

The relationships between exchange rates, capital controls and foreign reserves during the financial crisis suggest that reserve management plays a much more central role than has typically been emphasized in international finance models. Reserves seem to be especially important for non-EZ European countries, not only for those with currencies in the ERM II, but also for those European countries in intermediate regimes that hope to deter currency market pressure, and in so doing help to mitigate trilemma trade-offs.