Optimal Reserve Management and Sovereign Debt

Laura Alfaro and Fabio Kanczuk

No 13216, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model that incorporates willingness-to-pay incentive problems. In this setup, debt and assets are not perfect substitutes, as reserves can be used even after a country has defaulted. We calibrate the model to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

JEL-codes: F32 F33 F34 F4 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-cba and nep-dge
Note: IFM PE
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Citations: View citations in EconPapers (9)

Published as Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.

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Related works:
Journal Article: Optimal reserve management and sovereign debt (2009)
Working Paper: Optimal reserve management and sovereign debt (2007)
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