NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Debt Redemption and Reserve Accumulation

Laura Alfaro, Fabio Kanczuk

NBER Working Paper No. 19098
Issued in June 2013
NBER Program(s):   IFM

Foreign participation in local-currency bond markets in emerging countries has increased dramatically over the past decade. In light of this trend, we revisit sovereign debt sustainability and incentives to default when the sovereign is temporarily excluded from capital markets. Differently from previous analyses, we assume that in addition to accumulating international reserves, countries can borrow internationally using their own currency. As opposed to traditional sovereign debt models (all in foreign currency), the asset valuation effects occasioned by currency depreciation (or appreciation) act to absorb global shocks and render consumption smoother. In this setting, countries do not accumulate high levels of reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating high levels of reserves acts as a hedge against negative external shocks. A quantitative exercise, in which our model matches features of the Brazilian economic fluctuations and exchange-rate volatility, suggests this strategy to be highly effective for smoothing consumption and reducing the occurrence of default.

download in pdf format
   (622 K)

email paper

This paper was revised on August 26, 2015

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19098

Users who downloaded this paper also downloaded these:
Nekarda and Ramey w19099 The Cyclical Behavior of the Price-Cost Markup
Engel w19336 Exchange Rates and Interest Parity
Devereux and Yetman w19091 Capital Controls, Global Liquidity Traps and the International Policy Trilemma
Ready, Roussanov, and Ward w19371 Commodity Trade and the Carry Trade: a Tale of Two Countries
Du, Wei, and Xie w19291 Roads and the Real Exchange Rate
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

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

Contact Us