Optimal Reserve Management and Sovereign Debt

37 Pages Posted: 3 Jul 2007 Last revised: 11 Feb 2021

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Fabio Kanczuk

University of São Paulo (USP) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2007

Abstract

To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model that incorporates willingness-to-pay incentive problems. In this setup, debt and assets are not perfect substitutes, as reserves can be used even after a country has defaulted. We calibrate the model to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

Suggested Citation

Alfaro, Laura and Kanczuk, Fabio, Optimal Reserve Management and Sovereign Debt (July 2007). NBER Working Paper No. w13216, Available at SSRN: https://ssrn.com/abstract=998001

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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