The cost of holding foreign exchange reserves
Eduardo Levy Yeyati () and
Juan Francisco Gómez
School of Government Working Papers from Universidad Torcuato Di Tella
Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
Keywords: International reserves; exchange rate policy; capital flows; financial crisis (search for similar items in EconPapers)
JEL-codes: E42 E52 F33 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Working Paper: The Cost of Holding Foreign Exchange Reserves (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpgobi:wp_gob_2018_7
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