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The Cost of Reserves

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  • Eduardo Levy Yeyati

Abstract

The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated.

Suggested Citation

  • Eduardo Levy Yeyati, 2006. "The Cost of Reserves," Business School Working Papers 2006-10, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpbsdt:2006-10
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