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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 International Monetary Fund in its series IMF Working Papers with number 13/33.

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Length: 40
Date of creation: 31 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/33

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Keywords: Reserves; Capital flows; Emerging markets; Economic models; reserve accumulation; reserve holdings; bonds; sovereign debt; short-term debt; bond price; debt obligations; reserve management; sovereign bonds; public debt; access to debt; debt renegotiations; sovereign defaults; financial markets; international capital; central bank; debt contracts; access to debt markets; government debt; domestic agents; debt stock; current account; hedging; low debt; debt maturity; government bond; debt statistics; reserve bank; repayments; balance of payment crises; debt crises; reserve accumulations; financial instruments; private credit; bond spreads; debt dynamics; bond prices; hedge; risk-free interest rate; sovereign debt renegotiations; reserve managers; long-term debt;

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Citations

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Cited by:
  1. Javier Bianchi, 2012. "Comment on "Capital Account Policies and the Real Exchange Rate"," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER International Seminar on Macroeconomics 2012, pages 43-48 National Bureau of Economic Research, Inc.
  2. Broner, Fernando A & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio, 2011. "Gross Capital Flows: Dynamics and Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8591, C.E.P.R. Discussion Papers.
  3. 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, Elsevier, vol. 43(C), pages 19-49.
  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, Board of Governors of the Federal Reserve System (U.S.) 1073, Board of Governors of the Federal Reserve System (U.S.).
  6. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  7. Cheng, Gong, 2011. "A Growth Perspective on Foreign Reserve Accumulation," MPRA Paper 46668, University Library of Munich, Germany, revised 01 Mar 2013.

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