International Reserves and Rollover Risk
By Javier Bianchi, J. Hatchondo, Leonardo Martinez. The American Economic Review, 2013
114 citations recorded by the source corpus.
We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for significant holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period. (JEL E21, E43, F32, F34, H63)
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/9514d47a56fe29f3dd22355c5286c005b85dfc4c
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Citations in the corpus
- Fiscal Rules and the Sovereign Default Premium (2022, unknown): “See, for instance, Aguiar and Gopinath (2006), Arellano (2008), Bianchi et al. (2012), Cuadra and Sapriza (2008), D’Erasmo (2011), Durdu et al. (2013) Boz (2011), Lizarazo (2005, 2006), Pouzo and Presno (2013, 2014), Roch and Uhlig (2014), Sandleris et al. (2011) and Yue (2010).”
- On DSGE Models (2018, unknown): “For an example, see Bianchi et al. (2016) and the references therein.”
- A Theory of Foreign Exchange Interventions (2020, background): “In practice, an important concern of policymakers when deciding whether to implement taxes on financial flows is the ability of the private sector to circumvent them, i.e., whether capital controls may “leak,” as in Bengui and Bianchi (2018).”
- For a Few Dollars More: Reserves and Growth in Times of Crises (2015, unknown): “In fact, as Jeanne and Rancière (2011), Benigno and Fornaro (2012), Bianchi et al. (2012) demonstrate, a sufficient stock of reserves is useful to purchase foreign imports and to repay external debt coming due when no external borrowing is possible.”