Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk
Javier Bianchi () and
Cesar Sosa-Padilla ()
No 27323, NBER Working Papers from National Bureau of Economic Research, Inc
In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with ﬁxed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand ampliﬁcation generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that ﬁnancing reserves with debt accumulation may not necessarily lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our ﬁndings suggest that a simple linear rule linked to spreads can achieve signiﬁcant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
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Working Paper: Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk (2020)
Working Paper: Reserve Accumulation, Macroeconomic Stabilization and Sovereign Risk (2018)
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