This study investigates the effects of terms of trade shocks and international reserves on the real effective exchange rate. For this purpose is used panel data technique and data related to 20 countries for 1980- 2008 period. Estimation results show that international reserves have buffer effect in terms of trade shocks and cause terms of trade shocks have less effect on real exchange rate. Of course this result confirms in developing countries, but don’t confirm in developed countries. In addition according to results, reserve effect in reduction terms of trade shocks effect in oil exporting countries is more than other countries. Also, according to estimations in this study, increase in financial development reduces buffer role of international reserves.

Keywords: Real effective exchange rate, terms of trade, international reserves, financial development, panel data

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