Sudden stops, limited enforcement, and optimal reserves

Yun Jung Kim

International Review of Economics & Finance, 2017, vol. 51, issue C, 273-282

Abstract: Using a limited-enforcement model in which a sovereign government decides jointly on external debt and foreign reserves, we quantitatively determine the optimal levels of reserves and external debt. When reserves are effective in reducing the probability of a sudden stop, the model can generate the reserves-to-debt ratio observed recently in developing countries. The optimal level of reserves is increasing in the country's fundamental vulnerability to sudden stops, the effectiveness of reserves in reducing the probability of a sudden stop, the output costs of crises, and risk aversion.

Keywords: International reserves; Sovereign debt; Sudden stops; Capital flows (search for similar items in EconPapers)
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:51:y:2017:i:c:p:273-282

DOI: 10.1016/j.iref.2017.06.001

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