EconPapers    
Economics at your fingertips  
 

Optimal reserve management and sovereign debt

Laura Alfaro and Fabio Kanczuk

Journal of International Economics, 2009, vol. 77, issue 1, 23-36

Abstract: Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, we find 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.

Keywords: Foreign; reserves; Sovereign; debt; Default; Sudden; stops; Sustainability (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (97) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022-1996(08)00098-6
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Optimal reserve management and sovereign debt (2007) Downloads
Working Paper: Optimal Reserve Management and Sovereign Debt (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:77:y:2009:i:1:p:23-36

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2024-02-12
Handle: RePEc:eee:inecon:v:77:y:2009:i:1:p:23-36