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International Reserves and Rollover Risk

  • Javier Bianchi
  • Juan Carlos Hatchondo
  • Leonardo Martinez

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 International Monetary Fund in its series IMF Working Papers with number 13/33.

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Length: 40
Date of creation: 31 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/33
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