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The Social Cost of Foreign Exchange Reserves


Dani Rodrik


Harvard University - Harvard Kennedy School (HKS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

January 2006

NBER Working Paper No. w11952

Abstract:     
There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30 percent of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1 percent of GDP. Conditional on existing levels of short-term foreign borrowing, this does not represent too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

Number of Pages in PDF File: 25

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Date posted: April 13, 2006  

Suggested Citation

Rodrik, Dani, The Social Cost of Foreign Exchange Reserves (January 2006). NBER Working Paper No. w11952. Available at SSRN: http://ssrn.com/abstract=877457

Contact Information

Dani Rodrik (Contact Author)
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-9454 (Phone)
617-496-5747 (Fax)
HOME PAGE: http://www.ksg.harvard.edu/rodrik/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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