confidence in the central bank. To measure these elements, we use the Corruption Perceptions Index (Transparency International 2019a, 2019b), which scores 180 countries based on experts and business executives’ perceptions of the level of corruption in a country's public sector. It is a composite index combining 13 surveys and assessments of corruption collected by various institutions. The index has a scale of 0-100, where zero represents the highest level of perceived corruption and 100 the lowest level of perceived corruption.<sup>10</sup> Finally, we use the Governance Pillar Score (MSCI). This index covers 198 countries to "assess the extent to which a country's long-term competitiveness is affected by its institutional capacity to support long-term stability and functioning of its financial, judicial, and political systems, and capacity to address the environmental and social risks.”<sup>11</sup> The Governance Pillar Score is included in the MSCI assessment on the environment, social, and governance (ESG) risk of sovereign countries. The best score is zero; the worst is ten. The index is derived from third-party sources and focuses on political rights and civil liberties, stability and peace, control of corruption, and public financial management.

**_Macroeconomic Variables._** We then use the country risk score from the Economist Intelligence Unit's Country Risk Model to control for the macroenvironment. <mark>This score rates country risk on a scale from zero (no risk) to 100 (maximum risk), by taking a simple average of the sovereign, currency, and banking sector risk scores of a given country.</mark><sup>12</sup> <mark>W</mark> e included this variable in the analysis to assess the macroenvironment in which central banks operate. Alternatively, we use the number of currency crises and the current account balance as a percentage of GDP as another means of describing the macroenvironment in which the central bank operates.

**_Reserve Adequacy Variables._** Finally, a central bank's risk tolerance and investment policy (number of eligible assets and currencies, portfolio duration, allocation to nontraditional asset classes) are linked to reserve adequacy.  All else being equal, a central bank with higher reserve adequacy typically has a higher risk tolerance and can deploy a broader range of asset classes, currencies, and longer duration. Therefore, we use reserve adequacy measures to control for differences in reserve adequacy across central banks. We include two reserve adequacy metrics as control variables: reserves to GDP and to M2. Separately, we also control for GDP per capita and other macroeconomic variables, such as short-term external debt stocks as a percentage of total reserves.

# **4.2 RAMP Survey Variables**

RAMP's global surveys on reserve management practices are the source for information on central banks' governance arrangements, investment policies, and measures of risk taking. RAMP conducted two surveys in 2017 and 2019 with responses from 99 and 105 central banks, respectively.<sup>13</sup> The RAMP survey data are unique. For the first time, data on governance

> 10. See https://www.transparency.org/en/cpi and

> <u>https://images.transparencycdn.org/images/2019_CPI_SourceDescription_EN-converted-merged.pdf.</u> 11. See https://www.msci.com/documents/10199/e092c439-34e1-4055-8491-86fb0799c38f. 12. See https://www.eiu.com/n/solutions/country-risk-model/.

> 13. Anasashvili et al. (2020); see

<u>https://openknowledge.worldbank.org/bitstream/handle/10986/33657/K880541.pdf?sequence=1&isAllowed=y.</u> 9