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Sovereign defaults and optimal reserves management

  • Leonardo Martinez

    (International Monetary Fund)

  • Juan Hatchondo

    (Federal Reserve Bank of Richmond)

  • Javier Bianchi

    (NYU and Wisconsin)

A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and foreign reserves. When calibrated to the data, the model can successfully explain the simultaneous holdings of debt and foreign reserves. We also show that the relationship between reserves and default risk may be non-monotonic.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_1125.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1125.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1125
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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