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Sudden stops, limited enforcement, and optimal reserves

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  • Kim, Yun Jung

Abstract

Using a limited-enforcement model in which a sovereign government decides jointly on external debt and foreign reserves, we quantitatively determine the optimal levels of reserves and external debt. When reserves are effective in reducing the probability of a sudden stop, the model can generate the reserves-to-debt ratio observed recently in developing countries. The optimal level of reserves is increasing in the country's fundamental vulnerability to sudden stops, the effectiveness of reserves in reducing the probability of a sudden stop, the output costs of crises, and risk aversion.

Suggested Citation

  • Kim, Yun Jung, 2017. "Sudden stops, limited enforcement, and optimal reserves," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 273-282.
    • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:273-282
    DOI: 10.1016/j.iref.2017.06.001
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    Cited by:

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    3. Wilfredo L. Maldonado & Jorge Guillén & Jussara Ribeiro, 2021. "An international reserves variation threshold to increase loan funding," International Economics and Economic Policy, Springer, vol. 18(2), pages 247-265, May.

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    More about this item

    Keywords

    International reserves; Sovereign debt; Sudden stops; Capital flows;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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