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Debt Redemption and Reserve Accumulation

Author

Listed:
  • Laura Alfaro

    (Harvard Business School
    NBER)

  • Fabio Kanczuk

    (Universidade de São Paulo
    Ministry of Finance)

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.

Suggested Citation

  • Laura Alfaro & Fabio Kanczuk, 2019. "Debt Redemption and Reserve Accumulation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(2), pages 261-287, June.
  • Handle: RePEc:pal:imfecr:v:67:y:2019:i:2:d:10.1057_s41308-018-0058-4
    DOI: 10.1057/s41308-018-0058-4
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    Cited by:

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    2. 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]," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 35-55, August.
    3. 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.
    4. 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.

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    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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