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The Social Cost of Foreign Exchange Reserves

Listed author(s):
  • Dani Rodrik

    ()

There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30 percent of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1 percent of GDP. Conditional on existing levels of short-term foreign borrowing, this does not represent too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

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File URL: http://www.esocialsciences.org/Download/repecDownload.aspx?fname=Document12712006100.6208307.pdf&fcategory=Articles&AId=357&fref=repec
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Paper provided by eSocialSciences in its series Working Papers with number id:357.

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Date of creation: Jan 2006
Handle: RePEc:ess:wpaper:id:357
Note: Institutional Papers
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  1. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
  2. Raghuram G. Rajan & Eswar S. Prasad, 2005. "Controlled Capital Account Liberalisation: A Proposal," Working Papers id:278, eSocialSciences.
  3. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
  4. Michael Hutchison & Ilan Noy (Neuberger), 2002. "Sudden stops and the Mexican wave: currency crises, capital flow reversals and output loss in emerging markets," Pacific Basin Working Paper Series 2002-03, Federal Reserve Bank of San Francisco.
  5. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  6. Kym Anderson & Will Martin, 2005. "Agricultural Trade Reform and the Doha Development Agenda," Centre for International Economic Studies Working Papers 2005-17, University of Adelaide, Centre for International Economic Studies.
  7. Fernando Broner & Guido Lorenzoni & Sergio Schmuckler, 2006. "Why Do Emerging Economies Borrow Short Term?," 2006 Meeting Papers 841, Society for Economic Dynamics.
  8. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt44g3n2j8, Department of Economics, UC Santa Cruz.
  9. repec:bge:wpaper:185 is not listed on IDEAS
  10. Romain Ranciere & Olivier D Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries; Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
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