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Debt Redemption and Reserve Accumulation

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  • Laura Alfaro
  • Fabio Kanczuk

Abstract

In the past decade, foreign participation in local-currency bond markets in emerging countries has increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can borrow internationally using their own currencies and accumulate reserves. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and smooth consumption. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.

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  • Laura Alfaro & Fabio Kanczuk, 2013. "Debt Redemption and Reserve Accumulation," NBER Working Papers 19098, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19098
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    7. Agustin S. Benetrix & Beren Demirolmez & Martin Schmitz, 2021. "The shock absorbing role of cross-border investments: net positions versus currency composition," Trinity Economics Papers tep0421, Trinity College Dublin, Department of Economics.
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    9. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
    10. Vasilyev, Dmitry (Васильев, Дмитрий) & Busygin, Vladimir (Бусыгин, Владимир) & Busygin, Sergei (Бусыгин, Сергей), 2016. "Testing and Interpreting Uncovered Interest Parity in Russia [Проверка И Интерпретация Выполнения Процентного Паритета В России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 35-55, August.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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