The Cost of Reserves

Eduardo Levy Yeyati

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated.

Pages: 15 pages
Date: 2006-07
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Journal Article: The cost of reserves (2008)
Working Paper: The Cost of Reserves (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpbsdt:2006-10

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