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An Accumulation of International Reserves and External Debt: Evidence from Developing Countries

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  • Siti Nurazira Mohd Daud
  • Jan M. Podivinsky

Abstract

The main analytical contribution of this paper is to analyze the cost of the decision to jointly hold reserves and sovereign debt. By analyzing the impact of holding reserves and sovereign debt on sovereign credit ratings will provide the evidence of the costs of holding reserves and debt with respect to credit risk. It is found that the positive effect of accumulation reserves that aims to improve sovereign ratings has been crowding-out by the negative effect of accumulation external debt which resulted in a net negative effect. As such, it is suggested that countries reduce their sovereign debt in order to maintain a good credit risk position while holds international reserves at the optimal level of 3.67 in a month of imports which is slightly higher than the conventional rule.

Suggested Citation

  • Siti Nurazira Mohd Daud & Jan M. Podivinsky, 2011. "An Accumulation of International Reserves and External Debt: Evidence from Developing Countries," Global Economic Review, Taylor & Francis Journals, vol. 40(3), pages 229-249, September.
  • Handle: RePEc:taf:glecrv:v:40:y:2011:i:3:p:229-249
    DOI: 10.1080/1226508X.2011.601626
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    File URL: http://hdl.handle.net/10.1080/1226508X.2011.601626
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    Cited by:

    1. Corneli, Flavia & Tarantino, Emanuele, 2016. "Sovereign debt and reserves with liquidity and productivity crises," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 166-194.

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