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International reserves and rollover risk

  • Bianchi, Javier
  • Hatchondo, Juan Carlos
  • Martinez, Leonardo

Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-01.

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Length: 54 pages
Date of creation: 2013
Date of revision: 01 Jun 2013
Handle: RePEc:fip:fedrwp:13-01
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