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International Reserves versus External Debts : Can International reserves avoid future Financial Crisis in indebted Countries ?

  • Layal Mansour

    ()

    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

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    The aim of this paper is to evaluate the economic consequences on the countries that on one hand protect themselves from future financial crises by accumulating international reserves (IR) while on the other hand expose themselves to severe financial crisis due to their excessive internal and/or external public debt. Using the Financial Stress Indicator (FSI) proposed by Balakrishnan et al (2009) and IMF -which cover several aspects of financial crisis- and by applying the Markov switching model with time varying, we estimated the probability whether an indebted country is vulnerable to crises despite its accumulation of IR -acting as a buffer stock and self-insurance-. We studied the case of five emerging countries in Asia and Latin America that had increased both of their IR and public debts, and found that debt had increased the likelihood for a country to suffer from financial crisis, however IR did not necessarily provide “Peace” in the indebted countries except of some exceptions. We conclude that although debt and international reserves have theoretically opposite economic concerns for a country, the deleterious effects of debts might outweigh in most cases the beneficial effects of IR

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    Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 1329.

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    Date of creation: 2013
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    Handle: RePEc:gat:wpaper:1329
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    1. 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.
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