{
  "title": "International Reserves and Rollover Risk",
  "publication": "IMF Working Papers, January 31, 2013",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288",
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  "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.",
  "sections": [
    {
      "heading": "Summary and motivation",
      "content": "- Two empirical facts motivate the paper:\n  - Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost.\n  - Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises.\n- The paper proposes a dynamic model of endogenous default that can account for these facts.\n- The government faces a trade-off between:\n  - The benefits of keeping reserves as a buffer against rollover risk.\n  - The cost of having larger gross debt positions."
    },
    {
      "heading": "Model features and mechanisms",
      "content": "- Key model ingredients emphasized for quantitative success:\n  - Long-duration bonds.\n  - The countercyclical default premium.\n  - Sudden stops.\n- The model generates endogenous default decisions that interact with reserve holdings and rollover risk.\n- Rollover risk is central to explaining why reserves are accumulated despite their lower return relative to borrowing cost."
    },
    {
      "heading": "Main findings (paper-level)",
      "content": "- Reserve accumulation can be rationalized as insurance against rollover risk despite the lower return on reserves relative to sovereign borrowing cost.\n- Procyclicality of gross capital flows and their collapse in crises are linked to strategic interactions between domestic and foreign investors and sovereign rollover/default dynamics."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Reserve holdings should be evaluated not only by their direct return but also by their role in reducing rollover risk and mitigating sudden stops.\n- Debt structure (duration) matters: longer-duration bonds can alter default premia and the need for reserves.\n- Managing sovereign borrowing costs and maturity structure can complement reserve accumulation as a tool to reduce vulnerability to sudden stops."
    },
    {
      "heading": "Subjects and keywords (as listed)",
      "content": "- Subject: Asset and liability management, Balance of payments, Bonds, Central banks, Debt refinancing, Financial institutions, National accounts, Personal income, Reserves accumulation, Sudden stops\n- Keywords: Bonds, borrowing cost, debt duration, debt issuance, debt level, Debt refinancing, debt statistic, Global, gross capital flows, income loss, international reserves, long-duration bond, Personal income, reserve holding, Reserves accumulation, rollover risk, short-term debt, sovereign default, sudden stops, WP\n\n---\n\n Content in this bundle\n\n- wp1333 - References\n  - wp1333 - References (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp1333 - References (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288"
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    "Authors: Javier Bianchi, Juan Carlos Hatchondo, Leonardo Martinez",
    "Published: January 31, 2013",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475571295.001",
    "Two empirical facts motivate the paper:",
    "The paper proposes a dynamic model of endogenous default that can account for these facts.",
    "The government faces a trade-off between:",
    "Key model ingredients emphasized for quantitative success:",
    "The model generates endogenous default decisions that interact with reserve holdings and rollover risk.",
    "Rollover risk is central to explaining why reserves are accumulated despite their lower return relative to borrowing cost.",
    "Reserve accumulation can be rationalized as insurance against rollover risk despite the lower return on reserves relative to sovereign borrowing cost.",
    "Procyclicality of gross capital flows and their collapse in crises are linked to strategic interactions between domestic and foreign investors and sovereign rollover/default dynamics.",
    "Reserve holdings should be evaluated not only by their direct return but also by their role in reducing rollover risk and mitigating sudden stops.",
    "Debt structure (duration) matters: longer-duration bonds can alter default premia and the need for reserves.",
    "Managing sovereign borrowing costs and maturity structure can complement reserve accumulation as a tool to reduce vulnerability to sudden stops.",
    "Subject: Asset and liability management, Balance of payments, Bonds, Central banks, Debt refinancing, Financial institutions, National accounts, Personal income, Reserves accumulation, Sudden stops",
    "Keywords: Bonds, borrowing cost, debt duration, debt issuance, debt level, Debt refinancing, debt statistic, Global, gross capital flows, income loss, international reserves, long-duration bond, Personal income, reserve holding, Reserves accumulation, rollover risk, short-term debt, sovereign default, sudden stops, WP",
    "**_wp1333 - References**"
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