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Publications
Publications
  • February 2009
  • Article
  • Journal of International Economics

Optimal Reserve Management and Sovereign Debt

By: Laura Alfaro and Fabio Kanczuk
  • Format:Print
  • | Pages:14
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Abstract

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 crisis: 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 reserve accumulation does not play a quantitatively important role in this model. In fact, we find 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.

Keywords

Borrowing and Debt; Motivation and Incentives; Decisions; Emerging Markets; Balance and Stability; Earnings Management; Policy; Interest Rates; International Finance; Cost

Citation

Alfaro, Laura, and Fabio Kanczuk. "Optimal Reserve Management and Sovereign Debt." Journal of International Economics 77, no. 1 (February 2009): 23–36. (Also Harvard Business School Working Paper, No. 07-010, 2006 and NBER Working Paper No. 13216.)
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About The Authors

Laura Alfaro

General Management
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Fabio Kanczuk

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More from the Authors

    • 2022
    • Faculty Research

    Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register

    By: Laura Alfaro, Ester Faia and Camelia Minoiu
    • AEA Papers and Proceedings

    Undisclosed Debt Sustainability

    By: Laura Alfaro and Fabio Kanczuk
    • March 2022 (Revised June 2022)
    • Faculty Research

    El Salvador: Launching Bitcoin as Legal Tender

    By: Laura Alfaro, Carla Larangeira and Ruth Costas
More from the Authors
  • Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register By: Laura Alfaro, Ester Faia and Camelia Minoiu
  • Undisclosed Debt Sustainability By: Laura Alfaro and Fabio Kanczuk
  • El Salvador: Launching Bitcoin as Legal Tender By: Laura Alfaro, Carla Larangeira and Ruth Costas
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