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The Social Cost of Foreign Exchange Reserves

  • 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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Paper provided by eSocialSciences in its series Working Papers with number id:357.

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Date of creation: Jan 2006
Date of revision:
Handle: RePEc:ess:wpaper:id:357
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  1. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why do emerging economies borrow short term?," Economics Working Papers 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  2. Hutchison, Michael M. & Noy, Ilan, 2004. "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," Santa Cruz Department of Economics, Working Paper Series qt38j2b036, Department of Economics, UC Santa Cruz.
  3. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco.
  4. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  5. 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.).
  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. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
  8. Eswar Prasad & Raghuram Rajan, 2005. "Controlled Capital Account Liberalization: A Proposal," IMF Policy Discussion Papers 05/7, International Monetary Fund.
  9. repec:bge:wpaper:185 is not listed on IDEAS
  10. Romain Ranciere & Olivier 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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