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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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11952.

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Date of creation: Jan 2006
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Publication status: published as Rodrik, Dani. “The Social Cost of Foreign Exchange Reserves.” International Economic Journal 20, 3 (September 2006).
Handle: RePEc:nbr:nberwo:11952
Note: IFM
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  1. Broner, Fernando A & Lorenzoni, Guido & Schmukler, Sergio, 2007. "Why Do Emerging Economies Borrow Short Term?," CEPR Discussion Papers 6249, C.E.P.R. Discussion Papers.
  2. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
  3. repec:bge:wpaper:185 is not listed on IDEAS
  4. 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.
  5. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt2tn4w8x6, Department of Economics, UC Santa Cruz.
  6. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  7. Kym Anderson & Will Martin, 2005. "Agricultural Trade Reform and the Doha Development Agenda," The World Economy, Wiley Blackwell, vol. 28(9), pages 1301-1327, 09.
  8. 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.).
  9. Michael M. Hutchison & Ilan Noy, . "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," EPRU Working Paper Series 02-12, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  10. Eswar Prasad & Raghuram Rajan, 2005. "Controlled Capital Account Liberalization; A Proposal," IMF Policy Discussion Papers 05/7, International Monetary Fund.
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