The Source Matters: How Reserve Financing Affects Sovereign Credit Risk

Juan Francisco Gomez, Eduardo Levy Yeyati and Patricio Temperley
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Juan Francisco Gomez: UBA

No 370, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We develop a novel balance-of-payments (BoP) classification to distinguish reserves accumulated via public external borrowing (a precautionary "self-insurance" motive) from those built up through private capital inflows (sterilized "leaning-against-the-wind" of capital flows (or LAW interventions) to estimate the impact of reserve changes on sovereign spreads and financial stress according to their source of finance. We find that increases in reserves funded by private inflows significantly compress sovereign credit spreads and reduce the probability of a financial-stress episode, whereas reserves changes due to external debt issuance have a much weaker or a statistically insignificant effect. These findings hold in pre- and post- global financial crisis subsambles and robustness checks.

Keywords: Sovereign spreads; international reserves; balance-of-payments; "leaning against the wind" interventions (search for similar items in EconPapers)
Pages: 35 pages
Date: 2025-08
New Economics Papers: this item is included in nep-ifn and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:370

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