Contingent Reserves Management: An Applied Framework
In: External Vulnerability and Preventive Policies
One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100's implied volatility index (VIX), increases the expected reserves available during sudden stops by as much as 40 percent.
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|This chapter was published in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) External Vulnerability and Preventive Policies, , chapter 12, pages 399-420, 2006.|
|This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v10c12pp399-420.|
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- Pablo García & Claudio Soto, 2006.
"Large Hoardings of International Reserves: Are They Worth It?,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus Sc (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 6, pages 171-206
Central Bank of Chile.
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NBER Working Papers
9778, National Bureau of Economic Research, Inc.
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- Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves; Precautionary vs. Mercantilist Views, Theory, and Evidence," IMF Working Papers 05/198, International Monetary Fund.
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