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Reserve Uncertainty and the Supply of International Credit

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  • Aizenman, Joshua
  • Marion, Nancy

Abstract

This paper shows that uncertainty about an emerging market's international reserves can affect the willingness of foreign investors to supply international credits. We illustrate the relevance of this concern for South Korea. Uncertainty has asymmetric effects. When the expected reserve position of an emerging market is large relative to the potential bailout in bad states of nature, reserve volatility does not matter. However, the same amount of reserve volatility can cause a large reduction in the supply of international credit if the private sector seriously downgrades its priors about repayment possibilities or becomes more pessimistic about the emerging market's reserve position.

Suggested Citation

  • Aizenman, Joshua & Marion, Nancy, 2002. "Reserve Uncertainty and the Supply of International Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 631-649, August.
  • Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:3:p:631-49
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    References listed on IDEAS

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    1. Aizenman, Joshua & Marion, Nancy, 1999. "Volatility and Investment: Interpreting Evidence from Developing Countries," Economica, London School of Economics and Political Science, vol. 66(262), pages 157-179, May.
    2. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," FRB Atlanta Working Paper 98-10, Federal Reserve Bank of Atlanta.
    3. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
    4. Joshua Aizenman & Stephen J. Turnovsky, 2002. "Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?," Economic Journal, Royal Economic Society, vol. 112(476), pages 107-132, January.
    5. Alba, Pedro & Bhattacharya, Amar & Claessens, Stijn & Ghosh, Swati & Hernandez, Leonardo, 1998. "Volatility and contagion in a financially integrated world : lessons from East Asia's recent experience," Policy Research Working Paper Series 2008, The World Bank.
    6. Boyd, John H & Smith, Bruce D, 1994. "How Good Are Standard Debt Contracts? Stochastic versus Nonstochastic Monitoring in a Costly State Verification Environment," The Journal of Business, University of Chicago Press, vol. 67(4), pages 539-561, October.
    7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    8. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
    9. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
    10. Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-161, March.
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    Cited by:

    1. David Fernando LOPEZ ANGARITA, 2006. "Nivel óptimo de Reservas Internacionales y crisis cambiaria en Colombia," ARCHIVOS DE ECONOMÍA 003273, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
    2. Valev, Neven T., 2007. "Uncertainty and international debt maturity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(4), pages 372-386, October.
    3. Ricarda Demarmels & Andreas M. Fischer, 2002. "Understanding Reserve Volatility in Emerging Markets: A Look at the Last Thirty Years," Working Papers 02.02, Swiss National Bank, Study Center Gerzensee.
    4. Claudio Soto G. & Alberto Naudon D. & Eduardo López E. & Álvaro Aguirre R., 2004. "About International Reserve Adequacy: The Case of Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 7(3), pages 5-34, December.
    5. Demarmels, Ricarda & Fischer, Andreas M., 2003. "Understanding reserve volatility in emerging markets: a look at the long-run," Emerging Markets Review, Elsevier, vol. 4(2), pages 145-164, June.
    6. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
    7. Joshua Aizenman, 2004. "Financial Opening: Evidence and Policy Options," NBER Chapters,in: Challenges to Globalization: Analyzing the Economics, pages 473-498 National Bureau of Economic Research, Inc.
    8. Bernd Hayo, 2005. "Perspektiven einer Asiatischen Währungsunion," Marburg Working Papers on Economics 200508, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    9. Catherine S. F. Ho & M. Ariff, 2008. "The Role of Non-Parity Fundamentals in Exchange Rate Determination: Australia and the Asia Pacific Region," CARF F-Series CARF-F-125, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance

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