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Does It Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads

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  • César Sosa-Padilla

    (University of Notre Dame / NBER)

  • Federico Sturzenegger

    (Universidad de San Andrés/Harvard Kennedy School)

Abstract

There has been substantial research on the bene ts of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation a ects country risk. We rst present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We con rm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations.

Suggested Citation

  • César Sosa-Padilla & Federico Sturzenegger, 2021. "Does It Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads," Working Papers 79, Red Nacional de Investigadores en Economía (RedNIE).
  • Handle: RePEc:aoz:wpaper:79
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    References listed on IDEAS

    as
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    1. Does It Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads
      by Christian Zimmermann in NEP-DGE blog on 2021-08-14 23:10:45

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    Cited by:

    1. Benigno, Gianluca & Fornaro, Luca, 2012. "Reserve Accumulation, Growth and Financial Crises," CEPR Discussion Papers 9224, C.E.P.R. Discussion Papers.
    2. Gautam Nair & Federico Sturzenegger, 2022. "The Global Distributive Impact of the US Inflation Shock," Working Papers 160, Red Nacional de Investigadores en Economía (RedNIE).
    3. Gautam Nair & Federico Sturzenegger, 2022. "The Global Distributive Impact of the US Inflation Shock," Working Papers 165, Universidad de San Andres, Departamento de Economia, revised Aug 2022.

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    More about this item

    Keywords

    International reserves; contingent debt; sovereign default; country spreads.;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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