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International Reserves and Rollover Risk

International Reserves and Rollover Risk by Javier Bianchi
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Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model.
International Monetary Fund; January 2013
40 pages; ISBN 9781616359362
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Title: International Reserves and Rollover Risk
Author: Javier Bianchi; Juan Carlos Hatchondo; Leonardo Martinez