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The Cost of Reserves

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  • Eduardo Levy Yeyati

Abstract

The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated.

Suggested Citation

  • Eduardo Levy Yeyati, 2006. "The Cost of Reserves," Business School Working Papers 2006-10, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpbsdt:2006-10
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    References listed on IDEAS

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    1. Kevin Cowan & Eduardo Levy Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt In The Americas: New Data and Stylized Facts," Business School Working Papers 2006-09, Universidad Torcuato Di Tella.
    2. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
    3. Eduardo Levy Yeyati, 2008. "Liquidity Insurance in a Financially Dollarized Economy," NBER Chapters,in: Financial Markets Volatility and Performance in Emerging Markets, pages 185-218 National Bureau of Economic Research, Inc.
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    6. Sergio Pernice & Federico Sturzenegger, 2004. "Culture and social resistance to reform: a theory about the endogeneity of public beliefs with an application to the case of Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 275, Universidad del CEMA.
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    Cited by:

    1. Roland Beck & Sebastian Weber, 2011. "Should Larger Reserve Holdings Be More Diversified?," International Finance, Wiley Blackwell, vol. 14(3), pages 415-444, December.
    2. Steiner, Andreas, 2013. "How central banks prepare for financial crises – An empirical analysis of the effects of crises and globalisation on international reserves," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 208-234.
    3. Levy Yeyati, Eduardo, 2008. "The cost of reserves," Economics Letters, Elsevier, vol. 100(1), pages 39-42, July.
    4. Kurmas Akdogan, 2010. "Foreign Exchange Reserves in a Credit Constrained Economy," Birkbeck Working Papers in Economics and Finance 1014, Birkbeck, Department of Economics, Mathematics & Statistics.
    5. Eduardo Fernández-Arias & Eduardo Levy-Yeyati, 2012. "Global Financial Safety Nets: Where Do We Go from Here?," International Finance, Wiley Blackwell, vol. 15(1), pages 37-68, April.
    6. Qian, Xingwang & Steiner, Andreas, 2017. "International reserves and the maturity of external debt," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 399-418.
    7. Hur, Sewon & Kondo, Illenin O., 2016. "A theory of rollover risk, sudden stops, and foreign reserves," Journal of International Economics, Elsevier, vol. 103(C), pages 44-63.
    8. Marta Ruiz-Arranz & Milan Zavadjil, 2008. "Are Emerging Asia’s Reserves Really Too High?," IMF Working Papers 08/192, International Monetary Fund.
    9. Layal Mansour, 2014. "The Power of International Reserves: the impossible trinity becomes possible," Working Papers halshs-01054614, HAL.
    10. Eduardo Levy-Yeyati, 2011. "Exchange Rate Regimes," Business School Working Papers 2011-02, Universidad Torcuato Di Tella.
    11. Eduardo Levy-Yeyati & Tomás Williams, 2010. "US Rates and Emerging Markets Spreads," Business School Working Papers 2010-02, Universidad Torcuato Di Tella.

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