Contingent reserves management: an applied framework

Ricardo J Caballero () and Stavros Panageas

No 05-2, Working Papers from Federal Reserve Bank of Boston

Abstract: One of the most serious problems that a central bank in an emerging market economy can face is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100’s implied volatility index (VIX) increases the expected reserves available during sudden stops by as much as 40 percent.

Keywords: Banks and banking, Central; Emerging markets; Bank reserves (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec
Date: 2004
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Related works:
Working Paper: Contingent Reserves Management: An Applied Framework (2005)
Working Paper: Contingent Reserves Management: An Applied Framework (2004)
Journal Article: Contingent Reserves Management: an Applied Framework (2005)
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