International Reserves and Rollover Risk
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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. 2013/033
Subject:
Asset and liability management Balance of payments Bonds Central banks Debt refinancing Financial institutions National accounts Personal income Reserves accumulation Sudden stops
English
Publication Date:
January 31, 2013
ISBN/ISSN:
9781475571295/1018-5941
Stock No:
WPIEA2013033
Pages:
40
Please address any questions about this title to publications@imf.org