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International Reserves and Rollover Risk

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  • Mr. Leonardo Martinez
  • Juan Carlos Hatchondo
  • Javier Bianchi

Abstract

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.

Suggested Citation

  • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Javier Bianchi, 2013. "International Reserves and Rollover Risk," IMF Working Papers 2013/033, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2013/033
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    More about this item

    Keywords

    WP; borrowing cost; short-term debt; international reserves; rollover risk; sudden stops; sovereign default; gross capital flows; long-duration bond; debt level; reserve holding; debt issuance; debt statistic; debt duration; income loss; Reserves accumulation; Personal income; Debt refinancing; Bonds; Global;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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