25 Pages Posted: 13 Apr 2006
Date Written: January 2006
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: 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
By Dani Rodrik