Reserves and Risk: Evidence from China
40 Pages Posted: 1 Jun 2020
Date Written: May, 2020
We consider if the Chinese accumulation of reserves is associated with unintended consequences in the form of increased private sector risk taking. Using sovereign credit default swap spreads and stock index prices as indicators of risk taking, we provide evidence to suggest that as reserve holdings increase, so does the willingness of the private sector to take on more risk. This is an important finding that adds credence to the suggestion that insurance through costly reserves, to be used in the event of a crisis, may lead to private sector actions that in and of themselves make it more likely that this insurance will be used.
Keywords: International reserves, risk taking, China
JEL Classification: F31, G15
Suggested Citation: Suggested Citation