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International Reserves and Rollover Risk

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  • Javier Bianchi
  • Juan Carlos Hatchondo
  • Leonardo Martinez

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18628.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18628

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Cited by:
  1. Cheng, G., 2013. "A Growth Perspective on Foreign Reserve Accumulation," Working papers, Banque de France 443, Banque de France.
  2. Feldkircher, Martin, 2012. "The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 26/2012, Bank of Finland, Institute for Economies in Transition.
  3. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2010. "Gross capital flows: Dynamics and crises," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1227, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2012.
  4. 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.
  5. repec:fip:fedreq:y:2012:i:2q:p:139-157:n:vol.98no.2 is not listed on IDEAS
  6. Juan Carlos Hatchondo & Leonardo Martinez, 2013. "Sudden stops, time inconsistency, and the duration of sovereign debt," Working Paper, Federal Reserve Bank of Richmond 13-08, Federal Reserve Bank of Richmond.
  7. 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.).

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