## International Reserves and Rollover Risk

_IMF Working Papers, January 31, 2013_

## Source details

**Canonical URL:** [International Reserves and Rollover Risk](https://www.imf.org/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288/bundle-manifest.json)

## Bibliographic details
- Authors: Javier Bianchi, Juan Carlos Hatchondo, Leonardo Martinez
- Published: January 31, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475571295.001

---

### Summary and motivation
- Two empirical facts motivate the paper:
  - Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost.
  - Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises.
- The paper proposes 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.
  - The cost of having larger gross debt positions.

### Model features and mechanisms
- Key model ingredients emphasized for quantitative success:
  - Long-duration bonds.
  - The countercyclical default premium.
  - Sudden stops.
- 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.

### Main findings (paper-level)
- 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.

### Policy-relevant implications
- 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.

### Subjects and keywords (as listed)
- 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

---

## Content in this bundle

- **_wp1333 - References**
  - [_wp1333 - References (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1333.pdf.md){rel="alternate" type="text/markdown"}
  - [_wp1333 - References (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1333.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/international-reserves-and-rollover-risk-40288_