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International Reserves Management in a Model of Partial Sovereign Default

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  • Ricardo Sabbadini

Abstract

Despite the cost imposed by the interest rate spread between sovereign debt and international reserves, emerging countries’ governments maintain stocks of both. I investigate the optimality of this joint accumulation of assets and liabilities using a quantitative model of sovereign debt, in which: i) international reserves only function to smooth consumption, before or after a default; ii) the sovereign’s decision to repudiate debt determine the spread; iii) lenders are risk-averse; and iv) default is partial. Simulated statistics from the benchmark model match their observed counterparts for average debt and spread, consumption volatility, and the main correlations among the relevant variables. Due to the presence of partial default and risk-averse lenders, the model also produces a mean reserve level of 7.7% of GDP, indicating that the optimal policy is to hold positive amounts of reserves.

Suggested Citation

  • Ricardo Sabbadini, 2018. "International Reserves Management in a Model of Partial Sovereign Default," Working Papers, Department of Economics 2018_14, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2018wpecon14
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    More about this item

    Keywords

    international reserves; sovereign debt; sovereign default; partial default; interest rate spread;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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