International Reserves and Rollover Risk / Javier Bianchi, Juan Carlos Hatchondo, Leonardo Martinez.

Format:

Book

Author/Creator:

Bianchi, Javier, author.

Martínez, Leonardo, author.

Hatchondo, Juan Carlos, author.

Series:

Working paper series (National Bureau of Economic Research) ; Number 18628.

Working paper series (National Bureau of Economic Research) ; Number 18628

Language:

English

Subjects (All):

Foreign exchange reserves.

Risk--Econometric models.

Risk.

Capital movements--Econometric models.

Capital movements.

Default (Finance)--Econometric models.

Default (Finance).

Physical Description:

1 online resource (43 pages) : illustrations.

Place of Publication:

Cambridge, MA : National Bureau of Economic Research, 2012.

Summary:

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.

Notes:

Description based on publisher supplied metadata and other sources.