International Reserves and Rollover Risk

Author/Editor: Javier Bianchi ; Juan Carlos Hatchondo ; Leonardo Martinez
Publication Date: January 31, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.
Series: Working Paper No. 13/33
Subject(s): Reserves | Capital flows | Emerging markets | Economic models

Publication Date: January 31, 2013
ISBN/ISSN: 9781475571295/1018-5941 Format: Paper
Stock No: WPIEA2013033 Pages: 40
US$18.00 (Academic Rate:
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