Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk

Javier Bianchi and César Sosa Padilla
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César Sosa Padilla: University of Notre Dame/NBER
Authors registered in the RePEc Author Service: Cesar Sosa-Padilla

No 33, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not necessarily lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings sug- gest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.

Keywords: International; reserves; Sovereign; default; Macroeconomic; stabilization; Fixed; exchange; rates; Inflation; targeting (search for similar items in EconPapers)
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020-12
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mon and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk (2024)
Working Paper: Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk (2020)
Working Paper: Reserve Accumulation, Macroeconomic Stabilization and Sovereign Risk (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:33

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