International Reserves and Rollover Risk

Javier Bianchi, Juan Hatchondo and Leonardo Martinez

No 18628, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for significant holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.

JEL-codes: F41 F42 F44 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
Note: EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Published as Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2013. "International Reserves and Rollover Risk," IMF Working Papers, vol 13(33).
Published as Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, American Economic Association, vol. 108(9), pages 2629-2670, September.
Published as Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, vol 108(9), pages 2629-2670.

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Related works:
Journal Article: International Reserves and Rollover Risk (2018)
Working Paper: International Reserves and Rollover Risk (2016)
Working Paper: International reserves and rollover risk (2013)
Working Paper: International reserves and rollover risk (2013)
Working Paper: International Reserves and Rollover Risk (2013)
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