NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Contingent Reserves Management: An Applied Framework

Ricardo J. Caballero, Stavros Panageas

NBER Working Paper No. 10786
Issued in September 2004
NBER Program(s):   EFG   IFM

One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100's implied volatility index (VIX), increases the expected reserves available during sudden stops by as much as 40 percent.

download in pdf format
   (309 K)

email paper

This paper is available as PDF (309 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10786

Published:

  • Ricardo J. Caballero G. & Stavros Panageas, 2005. "Contingent Reserves Management: an Applied Framework," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 8(2), pages 45-56, August. citation courtesy of
  • Caballero, Ricardo, and Stavros Panageas. 2006."Contingent Reserves Management: An Applied Framework." In "External Vulnerability and Preventive Policies," edition 1, volume 10, edited by Ricardo Caballero, César Calderón, Luis Felipe Céspedes, and Norman Loayza (Series Editor), Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, chapter 12, pages 399-420

Users who downloaded this paper also downloaded these:
Caballero and Panageas w11293 A Quantitative Model of Sudden Stops and External Liquidity Management
Dooley, Folkerts-Landau, and Garber w10332 The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries
Caballero and Panageas w9778 Hedging Sudden Stops and Precautionary Contractions
Aizenman and Lee w11366 International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence
Aizenman w12734 International Reserves Management and the Current Account
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us