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Foreign Reserves as Hedging Instruments in Emerging Countries


  • Marcello Spanò

    () (Department of Economics, University of Insubria, Italy)


Emerging markets in the last decade increased the stock of foreign reserves and simultaneously managed to raise GDP growth while leaving short term foreign debt and investment in net fixed capital nearly unchanged. This work builds a model able to derive these facts as the result of greater openness to global goods and financial markets. Emerging countries generate the observed high ratios of reserves to short term foreign debt to hedge against volatility of foreign capital inflow with the purpose of stabilising not the short term but the long term finance available to domestic firms. Numerical simulations of the model derive the rising level of reserves to short term foreign debt ratio and about half of the observed rise in GDP growth as a result of a falling cost of long term finance and the increasing competitiveness of domestic industry.

Suggested Citation

  • Marcello Spanò, 2013. "Foreign Reserves as Hedging Instruments in Emerging Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(2), pages 203-230, April.
  • Handle: RePEc:voj:journl:v:60:y:2013:i:2:p:203-230

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    More about this item


    Foreign reserves; Short term foreign debt; Long term finance; Growth; Investment;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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