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Debt Redemption and Reserve Accumulation

Laura Alfaro and Fabio Kanczuk

No 19098, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the past decade, foreign participation in local-currency bond markets in emerging countries has increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can borrow internationally using their own currencies and accumulate reserves. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and smooth consumption. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.

JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-mon and nep-opm
Note: IFM
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Published as Laura Alfaro & Fabio Kanczuk, 2019. "Debt Redemption and Reserve Accumulation," IMF Economic Review, vol 67(2), pages 261-287.

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