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International reserves and rollover risk

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  • Javier Bianchi
  • Juan Carlos Hatchondo

Abstract

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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  • Javier Bianchi & Juan Carlos Hatchondo, 2013. "International reserves and rollover risk," Globalization Institute Working Papers 151, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:151
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    Keywords

    Macroeconomics - Econometric models;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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