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The Social Cost of Foreign Exchange Reserves

Dani Rodrik

No 5483, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not represent too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

Keywords: Emerging markets; Financial crises (search for similar items in EconPapers)
JEL-codes: F4 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-dev, nep-fmk and nep-ifn
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Citations: View citations in EconPapers (279)

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