Debt Redemption and Reserve Accumulation

40 Pages Posted: 8 Jun 2013 Last revised: 8 Mar 2021

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Fabio Kanczuk

University of São Paulo (USP) - Department of Economics

Date Written: June 2013

Abstract

In the past decade, foreign participation in local-currency bond markets in emerging countries has increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can borrow internationally using their own currencies and accumulate reserves. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and smooth consumption. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.

Suggested Citation

Alfaro, Laura and Kanczuk, Fabio, Debt Redemption and Reserve Accumulation (June 2013). NBER Working Paper No. w19098, Available at SSRN: https://ssrn.com/abstract=2276362

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Fabio Kanczuk

University of São Paulo (USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-900
Brazil
011-55-11-818-5915 (Phone)
011-55-11-3661-7333 (Fax)

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