International Reserves and Rollover Risk

41 Pages Posted: 22 Feb 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: January 2013

Abstract

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.

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

JEL Classification: F32, F34, F41

Suggested Citation

Bianchi, Javier and Hatchondo, Juan Carlos and Martinez, Leonardo, International Reserves and Rollover Risk (January 2013). IMF Working Paper No. 13/33, Available at SSRN: https://ssrn.com/abstract=2222497

Javier Bianchi

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

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Juan Carlos Hatchondo

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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