NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

International Reserves and Rollover Risk

Javier Bianchi, Juan Carlos Hatchondo, Leonardo Martinez

NBER Working Paper No. 18628
Issued in December 2012
NBER Program(s):   EFG   IFM

This paper provides a theoretical framework for quantitatively investigating the optimal accumulation of international reserves as a hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves and the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed.

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This paper was revised on July 19, 2013

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Document Object Identifier (DOI): 10.3386/w18628

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