International Reserves and Rollover Risk

FRB Richmond Working Paper No. 13-01R

54 Pages Posted: 2 Feb 2013 Last revised: 17 Jul 2013

See all articles by Javier Bianchi

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Juan Carlos Hatchondo

Indiana University Bloomington

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute

Date Written: June 30, 2013

Abstract

This paper provides a theoretical framework to quantitatively investigate the optimal accumulation of international reserves to hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves with the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed.

Keywords: international reserves, global safe assets, rollover risk, sudden stops, sovereign default, gross capital flows

JEL Classification: F32, F34, F41

Suggested Citation

Bianchi, Javier and Hatchondo, Juan Carlos and Martinez, Leonardo, International Reserves and Rollover Risk (June 30, 2013). FRB Richmond Working Paper No. 13-01R, Available at SSRN: https://ssrn.com/abstract=2210509 or http://dx.doi.org/10.2139/ssrn.2210509

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Juan Carlos Hatchondo (Contact Author)

Indiana University Bloomington ( email )

Dept of Biology
100 South Indiana Ave.
Bloomington, IN 47405
United States

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

HOME PAGE: http://works.bepress.com/leonardo_martinez/

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