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The Social Cost of Foreign Exchange Reserves

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Author Info
Rodrik, Dani

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Abstract

There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not represent too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5483.

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Date of creation: Jan 2006
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Handle: RePEc:cpr:ceprdp:5483

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Keywords: emerging markets financial crises

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F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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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. Anderson, Kym & Martin, Will, 2005. "Agricultural trade reform and the Doha development agenda," Policy Research Working Paper Series 3607, The World Bank. [Downloadable!]
    Other versions:
  2. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers 11366, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why Do Emerging Economies Borrow Short Term?," Economics Working Papers 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2007. [Downloadable!]
    Other versions:
  4. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. David Hauner, 2005. "A Fiscal Price Tag for International Reserves," IMF Working Papers 05/81, International Monetary Fund. [Downloadable!]
    Other versions:
  6. Michael Hutchison & Ilan Noy (Neuberger), 2002. "Sudden stops and the Mexican wave: currency crises, capital flow reversals and output loss in emerging markets," Pacific Basin Working Paper Series 02-03, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  7. Raghuram Rajan & Eswar Prasad, 2005. "Controlled Capital Account Liberalization: A Proposal," IMF Policy Discussion Papers 05/7, International Monetary Fund. [Downloadable!]
  8. 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!]
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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. Jeffrey A. Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," NBER Working Papers 14016, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Lane, Philip R. & Schmukler, Sergio L., 2007. "The international financial integration of China and India," Policy Research Working Paper Series 4132, The World Bank. [Downloadable!]
    Other versions:
  3. Yin-wong Cheung & Hiro Ito, 2008. "Hoarding of International Reserves: A Comparison of the Asian and Latin American Experiences," Working Papers 072008, Hong Kong Institute for Monetary Research. [Downloadable!]
  4. Yuko Hashimoto, 2008. "Too Much for Self-Insurance? Asian Foreign Reserves," Working Papers 062008, Hong Kong Institute for Monetary Research. [Downloadable!]
  5. Alice Y. Ouyang & Ramkishen S. Rajan & Thomas D. Willett, 2007. "China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients," Working Papers 102007, Hong Kong Institute for Monetary Research. [Downloadable!]
  6. Kirill Sosunov & Oleg Zamulin, 2007. "The inflationary consequences of real exchange rate targeting via accumulation of reserves," Working Papers WP13_2007_17, Laboratory for Macroeconomic Analysis. [Downloadable!]
    Other versions:
  7. Robert Lavigne, 2008. "Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks," Discussion Papers 08-4, Bank of Canada. [Downloadable!]
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