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The Social Cost of Foreign Exchange Reserves

25 Pages Posted: 13 Apr 2006 Last revised: 30 Aug 2010

Dani Rodrik

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

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Date Written: January 2006

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.

Suggested Citation

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

Dani Rodrik (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.ksg.harvard.edu/rodrik/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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