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A Fiscal Price Tag for International Reserves

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Author Info
David Hauner

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Abstract

This paper examines the (quasi-)fiscal impact of the (opportunity) cost of international reserves. It proposes a conceptual framework, with particular emphasis on two hitherto somewhat neglected aspects: a more appropriate measure of gross opportunity cost, and potential savings from lower external debt spreads that countries 'buy' by holding reserves. The framework is then applied to 100 countries over 1990-2004. The results suggest that a turning point has been reached in recent years: while most countries made money on their reserves during 1990-2001, most have been losing money during 2002-04. Copyright 2006 Blackwell Publishing Ltd.

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Article provided by Blackwell Publishing in its journal International Finance.

Volume (Year): 9 (2006)
Issue (Month): 2 (08)
Pages: 169-195
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Handle: RePEc:bla:intfin:v:9:y:2006:i:2:p:169-195

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert P. Flood & Nancy Peregrim Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
  2. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Blackwell Publishing, vol. 26(6), pages 873-891, 06. [Downloadable!] (restricted)
  3. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June. [Downloadable!] (restricted)
  4. Ben-Bassat, Avraham & Gottlieb, Daniel, 1992. "On the Effect of Opportunity Cost on International Reserve Holdings," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 329-32, May. [Downloadable!] (restricted)
  5. Jaewoo Lee, 2004. "Insurance Value of International Reserves: An Option Pricing Approach," IMF Working Papers 04/175, International Monetary Fund. [Downloadable!]
  6. Kletzer, Kenneth & Spiegel, Mark M., 2004. "Sterilization costs and exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 897-915, October. [Downloadable!] (restricted)
    Other versions:
  7. Darrell Duffie & Lasse Heje Pedersen & Kenneth J. Singleton, 2003. "Modeling Sovereign Yield Spreads: A Case Study of Russian Debt," Journal of Finance, American Finance Association, vol. 58(1), pages 119-159, 02. [Downloadable!] (restricted)
  8. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
  9. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marta Ruiz-Arranz & Milan Zavadjil, 2008. "Are Emerging Asia’s Reserves Really Too High?," IMF Working Papers 08/192, International Monetary Fund. [Downloadable!]
  2. David Hauner & Manmohan S. Kumar, 2006. "Fiscal Policy and Interest Rates--How Sustainable Is the "New Economy"?," IMF Working Papers 06/112, International Monetary Fund. [Downloadable!]
  3. Joshua Aizenman, 2006. "International Reserves Management and the Current Account," NBER Working Papers 12734, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Paulo Flavio Nacif Drummond, 2007. "Implications of Oil Inflows for Savings and Reserve Management in the CEMAC," IMF Working Papers 07/243, International Monetary Fund. [Downloadable!]
  5. Rodrik, Dani, 2006. "The Social Cost of Foreign Exchange Reserves," CEPR Discussion Papers 5483, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Jurgen Von Hagen & Iulia Siedschlag, 2008. "Managing Capital Flows: Experiences from Central and Eastern Europe," Papers WP234, Economic and Social Research Institute (ESRI). [Downloadable!]
  7. Jeanne, Olivier & Rancière, Romain, 2008. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," CEPR Discussion Papers 6723, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. David Hauner & Manmohan S. Kumar, 2005. "Financial Globalization and Fiscal Perfomance in Emerging Markets," IMF Working Papers 05/212, International Monetary Fund. [Downloadable!]
  9. Daria Zakharova, 2008. "One-Size-Fits-One: Tailor-Made Fiscal Responses to Capital Flows," IMF Working Papers 08/269, International Monetary Fund. [Downloadable!]
  10. Andrea M. Maechler & Bas Berend Bakker & Christoph Duenwald & Piritta Sorsa & Andrew Tiffin, 2007. "Vulnerabilities in Emerging Southeastern Europe--How Much Cause for Concern?," IMF Working Papers 07/236, International Monetary Fund. [Downloadable!]
  11. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund. [Downloadable!]
  12. Edwin M. Truman, 2005. "Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances," Peterson Institute Working Paper Series WP05-6, Peterson Institute for International Economics. [Downloadable!]
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