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Hoarding for Stormy Days - Test of International Reserves Providing Financial Buffer Services

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  • Joshua Aizenman
  • Yothin Jinjarak

Abstract

This paper outlines a tractable cost-benefit analysis of the buffer stock financial services provided by international reserves and applies it to 8 of the largest Emerging Markets (BRICS, Indonesia, Mexico, Turkey) during 2000-2019. The efficient management of international reserves generates sizable benefits for countries characterized by hard-currency external debt. These benefits increase with the volatility of the real exchange rates and sovereign spreads. While the first-best policy calls for prudential regulations, counter-cyclical management of hoarding reserves in good times and selling them in bad times provides buffers stock financial services adding up to about 3% of GDP during our sample period.

Suggested Citation

  • Joshua Aizenman & Yothin Jinjarak, 2019. "Hoarding for Stormy Days - Test of International Reserves Providing Financial Buffer Services," NBER Working Papers 25909, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25909
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    References listed on IDEAS

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    1. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
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    5. Qian, Xingwang & Steiner, Andreas, 2017. "International reserves and the maturity of external debt," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 399-418.
    6. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, July.
    7. Yin-Wong Cheung & Menzie Chinn & Eiji Fujii, 2009. "Pitfalls in Measuring Exchange Rate Misalignment," Open Economies Review, Springer, vol. 20(2), pages 183-206, April.
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    9. Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2005. "Sargent-Wallace meets Krugman-Flood-Garber, or: why sovereign debt swaps do not avert macroeconomic crises," Economic Journal, Royal Economic Society, vol. 115(503), pages 343-367, April.
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    Cited by:

    1. Amstad, Marlene & Packer, Frank & Shek, Jimmy, 2020. "Does sovereign risk in local and foreign currency differ?," Journal of International Money and Finance, Elsevier, vol. 101(C).
    2. Joshua Aizenman & Yothin Jinjarak, 2020. "Hoarding for stormy days—Test of international reserves adjustment providing financial buffer stock services," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 656-675, August.
    3. Chokri Zehri, 2020. "The Domestic Impacts And Spillovers Of Capital Controls," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 65(227), pages 31-66, October –.
    4. Chokri Zehri, 2020. "Capital controls to manage foreign exchange reserves and foreign debts," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(1), pages 271-294.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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