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International reserves and rollover risk

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  • Javier Bianchi
  • Juan Carlos Hatchondo
  • Leonardo Martinez

Abstract

Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-01.

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Date of creation: 2013
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Handle: RePEc:fip:fedrwp:13-01

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Keywords: Economic growth ; Business cycles ; Financial markets ; Financial institutions;

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Cited by:
  1. Cheng, Gong, 2011. "A Growth Perspective on Foreign Reserve Accumulation," MPRA Paper 46668, University Library of Munich, Germany, revised 01 Mar 2013.
  2. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2011. "Gross capital flows: dynamics and crises," Banco de Espa�a Working Papers 1039, Banco de Espa�a.
  3. Juan Carlos Hatchondo & Leonardo Martinez, 2013. "Sudden stops, time inconsistency, and the duration of sovereign debt," IMF Working Papers 13/174, International Monetary Fund.
  4. 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.
  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. 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.
  7. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS

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