Optimal reserve management and sovereign debt

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Author

Laura Alfaro

Contributions

Kanczuk, Fabio, 1969- - Contributor
National Bureau of Economic Research. - Contributor

Publication

2007 - National Bureau of Economic Research, Cambridge, Mass, Massachusetts

Language

English

Word Count

7,500 words, Guess

Page Count

30 pages

Identifiers

OCLC Control Number157038135
Open LibraryOL17634575M

Description

Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitative important role in this model. In fact, we find the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

Subjects

Topics

External Debts Debts, External Econometric models Foreign Investments Investments, Foreign International finance Equilibrium (Economics)

Other Editions

Optimal reserve management and sovereign debtNational Bureau of Economic Research2007-01-01

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