One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden-stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100’s implied volatility index (VIX), increase the expected reserves available during sudden stops by as much as 40 percent.
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Article provided by Central Bank of Chile in its journal Economía Chilena.
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.:
Ricardo J. Caballero & Arvind Krishnamurthy, 2004.
"Inflation Targeting and Sudden Stops,"
NBER Chapters,
in: The Inflation-Targeting Debate, pages 423-446
National Bureau of Economic Research, Inc.
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