Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • 2020
  • Chapter
  • Asset Management at Central Banks and Monetary Authorities

Reserve Accumulation, Sovereign Debt, and Exchange Rate Policy

By: Laura Alfaro and Fabio Kanczuk
  • Format:Print
ShareBar

Abstract

In the past decade, foreign participation in local-currency bond markets in emerging countries increased dramatically. Additionally, emerging countries are increasingly deviating from inflation targeting regimes, managing their exchange rate and engaging in exchange-rate accumulation. In light of these trends, we revisit sovereign debt sustainability, and the choice of the optimal exchange-rate regime, under the assumptions that countries can accumulate reserves and borrow internationally using their own currency. As opposed to traditional sovereign debt models, asset valuation effects occasioned by currency fluctuations act to absorb global shock and render consumption smoother. Countries do not accumulate reserve to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. We propose that a “pseudo-flexible regime” is the best policy alternative for emerging nations that face international shocks. A quantitative exercise suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default and obtains that optimal reserve holdings turn out to be as large as those presently observed.

Keywords

Reserves; Exchange Rate; Sovereign Finance; Currency Exchange Rate; Policy

Citation

Alfaro, Laura, and Fabio Kanczuk. "Reserve Accumulation, Sovereign Debt, and Exchange Rate Policy." In Asset Management at Central Banks and Monetary Authorities: New Practices in Managing International Foreign Exchange Reserves, edited by Jacob Bjorheim. Springer, 2020. (Book link.)

About The Author

Laura Alfaro

General Management
→More Publications

More from the Authors

    • 2023
    • Faculty Research

    Global Supply Chains: The Looming 'Great Reallocation'

    By: Laura Alfaro and Davin Chor
    • 2023
    • Faculty Research

    Urgent: The IMF Must Reform

    By: Laura Alfaro, Guillermo Calvo, José de Gregorio, Augusto de la Torre, Roque Fernandez, Pablo Guidotti, Enrique Mendoza, Ernesto Talvi, Liliana Rojas-Suarez and Andrés Velasco
    • April 2023
    • Journal of the European Economic Association

    The Real Exchange Rate, Innovation and Productivity

    By: Laura Alfaro, Alejandro Cuñat, Harald Fadinger and Yanping Liu
More from the Authors
  • Global Supply Chains: The Looming 'Great Reallocation' By: Laura Alfaro and Davin Chor
  • Urgent: The IMF Must Reform By: Laura Alfaro, Guillermo Calvo, José de Gregorio, Augusto de la Torre, Roque Fernandez, Pablo Guidotti, Enrique Mendoza, Ernesto Talvi, Liliana Rojas-Suarez and Andrés Velasco
  • The Real Exchange Rate, Innovation and Productivity By: Laura Alfaro, Alejandro Cuñat, Harald Fadinger and Yanping Liu
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College