The Social Cost of Foreign Exchange Reserves

Dani Rodrik

Working Papers from eSocialSciences

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 percent 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 percent 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: foreign exchange reserves; GDP; developing countries; liquidity; insurance premium; foreign borrowing; imports; Economics. International Monetary Relations; Macroeconomics (search for similar items in EconPapers)
Date: 2006-01
Note: Institutional Papers
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (263)

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Related works:
Working Paper: The Social Cost of Foreign Exchange Reserves (2006)
Working Paper: The Social Cost of Foreign Exchange Reserves (2006)
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