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The Cost of Reserves

  • Eduardo Levy Yeyati
  • Ugo Panizza

Few would dispute that sovereign defaults entail significant economic costs, including, most notably, important output losses. However, most of the evidence supporting this conventional wisdom, based on annual observations, suffers from serious measurement and identification problems. To address these drawbacks, we examine the impact of default on growth by looking at quarterly data for emerging economies. We find that, contrary to what is typically assumed, output contractions precede defaults. Moreover, we find that the trough of the contraction coincides with the quarter of default, and that output starts to grow thereafter, indicating that default episode, rather than a further decline, seems to mark the beginning of the economic recovery. This suggests that whatever negative effects a default may have on output, they are driven by its anticipation, independently of whether or not the country ultimately decides to validate it.

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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2006-11.

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Length: 39 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:udt:wpbsdt:2006-11
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Web page: http://www.utdt.edu/listado_contenidos.php?id_item_menu=4994

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  1. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  2. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
  3. Kevin Cowan & Eduardo Levy Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt in the Americas: New Data and Stylized Facts," Research Department Publications 4480, Inter-American Development Bank, Research Department.
  4. Eduardo Borensztein & Ugo Panizza, 2006. "Do Sovereign Defaults Hurt Exporters?," IDB Publications (Working Papers) 6704, Inter-American Development Bank.
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  6. Eduardo Levy Yeyati, 2006. "The Cost of Reserves," Business School Working Papers 2006-10, Universidad Torcuato Di Tella.
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  8. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," Business School Working Papers liquid, Universidad Torcuato Di Tella.
  9. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
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  17. Eduardo Levy Yeyati, 2006. "Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries," Business School Working Papers 2006-12, Universidad Torcuato Di Tella.
  18. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  19. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
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