I agree with you and Rogoff's QJE article that using reserves entails limitations. Nonetheless, foreign exchange market intervention is still an important determinant of exchange rate movements, especially in emerging markets. Moreover, there might be a link to capital flows as well: countries may use reserves to disrupt sudden stops in capital inflows or use them for capital outflows. Is there a possibility to consider this aspect in your updated classification ?
Yes, foreign market intervention is done to reverse depreciation or devalue the overrated currency. Ordinarily, the forces of demand and supply are at play in a free market. However, because of political reasons or social-economic pressure or powerful lobbyists or dwindling balance of payments often invoke price fixing and/or foreign market interventions by central banks at the behest of governments. The currency manipulation is a monetary policy operation. The foreign exchange intervention occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency, generally with the intention of influencing the exchange rate.
It is a fact that many developing and emerging economies have exchange rate targets instead of inflation targets. Their central bank's reaction function is not the same as postulated by the inflation targeting framework or implied by the workhorse DSGE methodology. You have many countries effectively targeting the exchange rate - and by extension inflation - by using a combination of the compensation principle and foreign exchange interventions. Moreover, the implied offset effects of the Rogoff paper do not hold when commercial banks mark up interest rates and have liquidity preference.
Intervention that reduces exchange rate volatility, for example, also
reduces the risks of speculation, creating a feedback loop and potentially leading to
high levels of speculation, reserves volatility and intervention costs. These
intervention costs will be especially large when exchange rate movements are
driven by interest rate shocks, although some degree of opaqueness can help to
reduce them.
In the Fear of Floating exchange rate flexibiity indices we used reserves and also the policy interest rates. As the later can be raised/lowered to support/depreciate the currency as well as direct intervention. See https://ideas.repec.org/p/pra/mprapa/13196.html
In the current sample (many more countries going back to 1946, monthly) there are a lot of holes in the reserve series--which would seriously limit coverage.
Also, -reserves also fluctuate due to valuation changes (not just FOREX intervention). It is not as transparent an indicator as one tends to think.
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