Buffers and Borrowing: How Reserve Accumulation Shapes Sovereign Spreads and Debt Dynamics in Emerging Economies

This thesis studies how reserve accumulation stance shapes debt dynamics in emerging economies, using global financial shocks as a plausibly exogenous source of variation in external borrowing conditions. Using a quarterly panel of 38 emerging markets over 2000Q1–2023Q4, I classify reserve stance into Under, Adequate, and Over regimes based on the IMF’s Assessing Reserve Adequacy metric and exploit the Excess Bond Premium as a global risk shock. The empirical analysis combines state-dependent local projections, LP–2SLS specifications, and a sensitivity-based proxy approach. The reduced-form results show that reserve stance shapes the pass-through of global shocks to sovereign spreads: under-accumulation amplifies the spread response, whereas over-accumulation dampens it. The LP–2SLS estimates show that the short-run semi-elasticity of external debt to spreads is positive in the Adequate regime, with a positive Over-accumulation differential, indicating that attenuated pass-through to spreads is associated with stronger transmission to external debt. The sensitivity-based approach further shows that, in the benchmark exercise, countries whose spreads are more sensitive to the common shock exhibit more muted debt responses. However, once within-state heterogeneity is allowed, countries with higher spread sensitivity exhibit stronger debt responses in the Under and Adequate regimes, whereas in the Over regime the relationship turns negative. These results suggest that reserve accumulation affects debt dynamics by altering both the transmission of global shocks to borrowing costs and the subsequent debt adjustment. An extension to additional macroeconomic outcomes shows that reserve stance affects the composition of macroeconomic adjustment: the Over regime is associated with a substantially smaller depreciation and a more muted trade-balance adjustment, but also with a larger short-run contraction in real activity and a higher medium-horizon price-level response.