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The Cost of Reserves

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  • Eduardo Levy Yeyati

Abstract

The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated.

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Bibliographic Info

Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2006-10.

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Length: 15 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:udt:wpbsdt:2006-10

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References

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  2. Martín González-Rozada & EduardoLevy Yeyati, 2008. "Global Factors and Emerging Market Spreads," Economic Journal, Royal Economic Society, vol. 118(533), pages 1917-1936, November.
  3. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
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  5. Martinez, Jose Vicente & Sandleris, Guido, 2011. "Is it punishment? Sovereign defaults and the decline in trade," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 909-930, October.
  6. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," EUI-RSCAS Working Papers 18, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  7. Kevin Cowan & Eduardo Levy-Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt in the Americas: New Data and Stylized Facts," Working Papers Central Bank of Chile 371, Central Bank of Chile.
  8. Bodman, Philip M & Crosby, Mark, 2002. "The Australian Business Cycle: Joe Palooka or Dead Cat Bounce?," Australian Economic Papers, Wiley Blackwell, vol. 41(2), pages 191-207, June.
  9. Gianni De Nicoló & Alain Ize & Patrick Honohan, 2003. "Dollarization of the Banking System: Good or Bad?," IMF Working Papers 03/146, International Monetary Fund.
  10. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt2tn4w8x6, Department of Economics, UC Santa Cruz.
  11. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
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  14. Eduardo Borensztein & Ugo Panizza, 2010. "Do Sovereign Defaults Hurt Exporters?," Open Economies Review, Springer, vol. 21(3), pages 393-412, July.
  15. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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  17. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt44g3n2j8, Department of Economics, UC Santa Cruz.
  18. Eduardo Levy Yeyati, 2006. "Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries," Business School Working Papers 2006-12, Universidad Torcuato Di Tella.
  19. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  20. Ozler, Sule, 1993. "Have Commercial Banks Ignored History?," American Economic Review, American Economic Association, vol. 83(3), pages 608-20, June.
  21. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series qt44g3n2j8, Center for International Economics, UC Santa Cruz.
  22. Sergio Pernice & Federico Sturzenegger, 2004. "Culture and social resistance to reform: a theory about the endogeneity of public beliefs with an application to the case of Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 275, Universidad del CEMA.
  23. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  24. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
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Citations

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Cited by:
  1. Roland Beck & Sebastian Weber, 2010. "Should larger reserve holdings be more diversified?," Working Paper Series 1193, European Central Bank.
  2. Marta Ruiz-Arranz & Milan Zavadjil, 2008. "Are Emerging Asia’s Reserves Really Too High?," IMF Working Papers 08/192, International Monetary Fund.
  3. Eduardo Levy-Yeyati & Tomás Williams, 2010. "US Rates and Emerging Markets Spreads," Business School Working Papers 2010-02, Universidad Torcuato Di Tella.
  4. Kurmas Akdogan, 2010. "Foreign Exchange Reserves in a Credit Constrained Economy," Birkbeck Working Papers in Economics and Finance 1014, Birkbeck, Department of Economics, Mathematics & Statistics.

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