 International reserves and central bank independenceJournal of International Economics, 2022, vol. 139, issue C Abstract: Motivated by a positive correlation between reserve accumulation and the widespread adoption of central bank independence legislation in Latin America, this paper develops a sovereign default model with an independent central bank that can accumulate a risk-free foreign asset. I show that if the central bank is more patient than the government and as patient as households are, in equilibrium, the government issues more debt than what is socially optimal, and the central bank accumulates reserves to undo government over-borrowing. A key insight is that the government can issue more debt for any level of reserves but chooses not to because doing so would increase spreads, making it more costly to borrow. Quantitatively, I find that the lack of perfect coordination between the central bank and the government can rationalize levels of reserves and debt close to the observed levels in emerging economies. Keywords: International reserves; Central bank independence; Sovereign debt (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:139:y:2022:i:c:s0022199622001064 DOI: 10.1016/j.jinteco.2022.103674 Access Statistics for this article Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés More articles in Journal of International Economics from Elsevier |
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