A theory of rollover risk, sudden stops, and foreign reserves

Sewon Hur and Illenin Kondo

No 1073, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises (\"sudden stops\"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies.

Date: 2013
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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Journal Article: A theory of rollover risk, sudden stops, and foreign reserves (2016)
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