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International reserves and rollover risk

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  • Javier Bianchi
  • Juan Carlos Hatchondo

Abstract

This paper provides a theoretical framework for quantitatively investigating the optimal accumulation of international reserves as a hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves and the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 151.

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Date of creation: 2013
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Handle: RePEc:fip:feddgw:151

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Keywords: Macroeconomics - Econometric models;

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Citations

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Cited by:
  1. Cheng, G., 2013. "A Growth Perspective on Foreign Reserve Accumulation," Working papers 443, Banque de France.
  2. Broner, Fernando A & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio, 2011. "Gross Capital Flows: Dynamics and Crises," CEPR Discussion Papers 8591, C.E.P.R. Discussion Papers.
  3. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  4. Juan Carlos Hatchondo & Leonardo Martinez, 2013. "Sudden stops, time inconsistency, and the duration of sovereign debt," IMF Working Papers 13/174, International Monetary Fund.
  5. Sewon Hur & Illenin O. Kondo, 2013. "A theory of rollover risk, sudden stops, and foreign reserves," International Finance Discussion Papers 1073, Board of Governors of the Federal Reserve System (U.S.).
  6. Feldkircher, Martin, 2014. "The determinants of vulnerability to the global financial crisis 2008 to 2009: Credit growth and other sources of risk," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 19-49.
  7. Javier Bianchi, 2012. "Comment on "Capital Account Policies and the Real Exchange Rate"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 43-48 National Bureau of Economic Research, Inc.

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