The social cost of foreign exchange reserves

By Dani Rodrik. 2006

615 citations recorded by the source corpus.

Abstract There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not seem too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b8cf6581aa5d4c4bd72168458d5414862fecaf72

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Citations in the corpus

Financial versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding (2007, positive): “Rodrik (2006) offered a similar critique, by calling for simultaneous reduction of reserves and short-term external debt. regional pooling.”
International Reserves and Rollover Risk (2013, positive): “Moreover, reserves are invested in assets that provide a return significantly lower than the rate at which the government borrows (Rodrik, 2006).”
Monetary Policy in Emerging Markets (2010, background): “See Reinhart, Rogoff, and Savastano (2003b). 12 Burstein, Eichenbaum, and Rebelo (2003 Au25 , 2005) found that the price indexes are kept down by substitution away from imports toward cheaper local substitutes.”
The new IMF approach to capital account management and its blind spots: lessons from Brazil and South Korea (2014, background): “As Rodrik (2006, 12) has pointed out, during the period 2003–2007 these countries ‘over-invested in the costly strategy of reserve accumulation and under-invested in capital account management policies.’”
The Financial Crisis and Sizable International Reserves Depletion: From 'Fear of Floating' to the 'Fear of Losing International Reserves'? (2009, neutral): “See Rodrik (2006) for further discussion of policy options facing emerging markets that are concerned with exposure to sudden stops.”
Capital Account Policies and the Real Exchange Rate (2012, neutral): “…of the welfare is then given by δU0 = − ∫ s≥0,s 6=t u′(cs)qs s δb ∗ s e −r∗sds− u′(ct) (qt− − qt+) δb∗t , 12For the former approach see for example Edwards (1985) and Rodrik (2006), and for the latter see Flood and Marion (2001). where u′(ct) is a weighted average of the marginal utility of…”
The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications (2006, background): “The default risk premium is generally included in the interest rate differentials that are used to compute the opportunity cost of holding reserves (Rodrik, 2006).”
The global economic crisis, its gender and ethnic implications, and policy responses (2010, background): “Using that 1 per cent to alleviate short-term current account stresses resulting from the crisis is a viable option (Rodrik 2006; Cruz and Walters 2008).10 The shortfall in aggregate demand implies that counter-cyclical measures (also called ‘leaning against the wind’) are what are needed at this…”
Financialised Capitalism: Crisis and Financial Expropriation (2009, background): “Rodrik 2006 has put forth a widely used estimate of the social cost of reserves. subprime and 1.82% on prime ARM.3 Th us, the housing-market crisis started in subprime mortgages but then spread to the prime sector.”
Remittances and Vulnerability in Developing Countries (2014, background): “Many countries are increasingly relying on international reserves as a stabilization tool, but this imposes high social and economic costs (Rodrik, 2006).”
Foreign Exchange Reserve Accumulation in Emerging Markets: What are the Domestic Implications? (2006, positive): “For instance, Rodrik (2006) shows that there is a “social cost” to reserve accumulation to the extent that the private sector borrows at a higher rate than what the central bank earns on its foreign currency assets.”
The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications (2011, positive): “Reserves can be used to repay external liabilities, and the opportunity cost of reserves is de ned as the di¤erence between the interest rate paid on the country s liabilities and the lower return received on the reserves (Edwards, 1985; Garcia and Soto, 2004; Rodrik, 2006).”