Contingent Reserves Management: An Applied Framework
AbstractOne 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), increases the expected reserves available during sudden stops by as much as 40 percent.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 329.
Date of creation: Sep 2005
Date of revision:
Other versions of this item:
- Ricardo J. Caballero G. & Stavros Panageas, 2005. "Contingent Reserves Management: an Applied Framework," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 8(2), pages 45-56, August.
- Ricardo Caballero & Stavros Panageas, 2006. "Contingent Reserves Management: An Applied Framework," Central Banking, Analysis, and Economic Policies Book Series, in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 12, pages 399-420 Central Bank of Chile.
- Ricardo Caballero & Stavros Panageas, 2004. "Contingent reserves management: an applied framework," Working Papers 05-2, Federal Reserve Bank of Boston.
- Ricardo J. Caballero & Stavros Panageas, 2004. "Contingent Reserves Management: An Applied Framework," NBER Working Papers 10786, National Bureau of Economic Research, Inc.
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- G0 - Financial Economics - - General
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
This paper has been announced in the following NEP Reports:
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 & Stavros Panageas, 2003.
"Hedging Sudden Stops and Precautionary Contractions,"
NBER Working Papers
9778, National Bureau of Economic Research, Inc.
- Caballero, Ricardo J. & Panageas, Stavros, 2008. "Hedging sudden stops and precautionary contractions," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 28-57, February.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2004.
"Inflation Targeting and Sudden Stops,"
in: The Inflation-Targeting Debate, pages 423-446
National Bureau of Economic Research, Inc.
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