Foreign exchange reserves aka "foreign reserves" are the foreign currencies held by a country's central bank for the purpose of international trade. As of 2026, US dollars are the most common foreign reserve currency, and is dubbed the "world reserve currency".
Traditionally, debt-to-GDP ratio and trade openness were thought to be the primary determinants of a country's foreign reserve levels.
A research paper in 2018 found that "M2/GDP and OTC foreign capital inflows significantly influence cross-country variations in the reserves" ssrn.com/abstract=3108516 or dx.doi.org/10.2139/ssrn.3108516
Another research paper in 2020 found that the short-term interest rate differential, the lagged reserves-to-GDP ratio, the exports-to-GDP ratio, and the trade-to-GDP ratio are also significant determinants for *developing countries*. It found also that the presence of a currency crisis is significant since "nations may try to defend their currency by selling large amounts of reserves, so the relation is negative." doi.org/10.1142/S021759082048001X
According to the 2020 paper, the interest rate differential "represents the opportunity cost of reserves, and a higher interest rate differential is associated with a higher opportunity cost of reserves, having a negative relation to the reserves. One interpretation of this result is that there exists an inverted-U shape relationship between the size of reserves and their opportunity cost. The influence of the opportunity cost of reserves increases as nations accumulate reserves. Once the level of reserves exceeds a threshold, opportunity cost loses its effect as an important determinant."
The ratios of export to GDP and trade to GDP "have a positive relation to the international reserves because higher degrees of openness are expected to increase the demand for reserves."
For developed countries, the lagged reserves-to-GDP ratio, GDP per capita, external debt to GDP, the interest rate spread, and the industrial production-to-GDP levels are key determinants, according to the 2020 study. External debt to GDP has a negative impact on reserve levels, while GDP per capita and industrial production have a positive effect.
For all countries, "lagged reserves are positively related to the level of reserves because they are an amount of reserves required in the Federal reserve bank, based on the value of all outstanding deposits in the bank’s demand deposit accounts from two weeks prior."
It's not clear what the 2020 paper means by "interest rate spread" as opposed to "interest rate differential". Using context clues, I'm assuming they just refer to the Chinese and American Term Spread respectively. It says that interest rate spread has a positive correlation with reserve levels, "as high liquidity reserve requirements act as an implicit financial tax by keeping interest rates high". This is in contrast to the "interest rate differential", which has a negative correlation.