Contingent Reserves Management: An Applied Framework

Ricardo Caballero () and Stavros Panageas

No 10786, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100's implied volatility index (VIX), increases the expected reserves available during sudden stops by as much as 40 percent.

JEL-codes: C1 E2 E3 F3 F4 G0 (search for similar items in EconPapers)
Date: 2004-09
Note: EFG IFM
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Citations: View citations in EconPapers (33)

Published as Ricardo J. Caballero G. & Stavros Panageas, 2005. "Contingent Reserves Management: an Applied Framework," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 8(2), pages 45-56, August.
Published as Caballero, Ricardo, and Stavros Panageas. 2006."Contingent Reserves Management: An Applied Framework." In "External Vulnerability and Preventive Policies," edition 1, volume 10, edited by Ricardo Caballero, César Calderón, Luis Felipe Céspedes, and Norman Loayza (Series Editor), Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, chapter 12, pages 399-420

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Chapter: Contingent Reserves Management: An Applied Framework (2006)
Journal Article: Contingent Reserves Management: an Applied Framework (2005)
Working Paper: Contingent Reserves Management: An Applied Framework (2005)
Working Paper: Contingent reserves management: an applied framework (2004)
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