International Reserves and Rollover Risk

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International Reserves and Rollover Risk
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Volume/Issue:
2013/33
Series:
IMF Working Papers
Author(s):
Javier Bianchi, Juan Carlos Hatchondo, and Leonardo Martinez
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
January 2013
DOI:
http://dx.doi.org/10.5089/9781475571295.001
ISBN:
9781475571295
ISSN:
1018-5941
Page:
40
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.
Article

International Reserves and Rollover Risk

Author(s):
Javier Bianchi, Juan Carlos Hatchondo, and Leonardo Martinez
Published Date:
January 2013
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