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The Source Matters: How Reserve Financing Affects Sovereign Credit Risk

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Listed:
  • Juan Francisco Gomez

    (UBA)

  • Eduardo Levy Yeyati

    (UTDT)

  • Patricio Temperley

    (UTDT)

Abstract

We develop a novel balance-of-payments (BoP) classification to distinguish reserves accumulated via public external borrowing (a precautionary "self-insurance" motive) from those built up through private capital inflows (sterilized "leaning-against-the-wind" of capital flows (or LAW interventions) to estimate the impact of reserve changes on sovereign spreads and financial stress according to their source of finance. We find that increases in reserves funded by private inflows significantly compress sovereign credit spreads and reduce the probability of a financial-stress episode, whereas reserves changes due to external debt issuance have a much weaker or a statistically insignificant effect. These findings hold in pre- and post- global financial crisis subsambles and robustness checks.

Suggested Citation

  • Juan Francisco Gomez & Eduardo Levy Yeyati & Patricio Temperley, 2025. "The Source Matters: How Reserve Financing Affects Sovereign Credit Risk," Working Papers 370, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:370
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/370.pdf
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    References listed on IDEAS

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    1. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
    2. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, July.
    3. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
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