Optimal reserve management and sovereign debt
By: by Laura Alfaro and Fabio Kanczuk
Contributors: Kanczuk, Fabio, 1969-
Series: Working paper / Weatherhead Center For International Affairs -- 06-06; Working paper series (Weatherhead Center for International Affairs) -- no. 06-06
Publisher: Weatherhead Center for International Affairs, Harvard University
Published: 2006
Place of publication: Cambridge, MA
Language: eng
Number of pages: 33
Subjects: External Debts; Public Debts; Reserves (Accounting)
Description: "Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crises: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that 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 -- abstract.
Notes: "October 2006."

Includes bibliographical references.