International Reserves and Rollover Risk

Javier Bianchi, Juan Hatchondo and Leonardo Martinez

No 735, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: 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 a significant fraction of the 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, larger contingent liabilities, 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.

Keywords: Sovereign default; international reserves; rollover risk; safe assets (search for similar items in EconPapers)
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2016-11-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn and nep-opm
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: International Reserves and Rollover Risk (2018)
Working Paper: International reserves and rollover risk (2013)
Working Paper: International reserves and rollover risk (2013)
Working Paper: International Reserves and Rollover Risk (2013)
Working Paper: International Reserves and Rollover Risk (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:735

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