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The Social Cost of Foreign Exchange Reserves

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  • Dani Rodrik

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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 percent 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 percent 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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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:357.

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Date of creation: Jan 2006
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Handle: RePEc:ess:wpaper:id:357

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Related research

Keywords: foreign exchange reserves; GDP; developing countries; liquidity; insurance premium; foreign borrowing; imports; Economics. International Monetary Relations; Macroeconomics;

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  1. Hutchison, Michael M. & Noy, Ilan, 2004. "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," Santa Cruz Department of Economics, Working Paper Series qt88m6g98w, Department of Economics, UC Santa Cruz.
  2. 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.).
  3. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
  4. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
  5. Broner, Fernando A & Lorenzoni, Guido & Schmukler, Sergio, 2007. "Why Do Emerging Economies Borrow Short Term?," CEPR Discussion Papers 6249, C.E.P.R. Discussion Papers.
  6. Kym Anderson & Will Martin, 2005. "Agricultural Trade Reform and the Doha Development Agenda," Centre for International Economic Studies Working Papers 2005-17, University of Adelaide, Centre for International Economic Studies.
  7. repec:bge:wpaper:185 is not listed on IDEAS
  8. Eswar Prasad & Raghuram Rajan, 2005. "Controlled Capital Account Liberalization," IMF Policy Discussion Papers 05/7, International Monetary Fund.
  9. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries," IMF Working Papers 06/229, International Monetary Fund.
  10. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
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