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Renminbi. --- Foreign exchange reserves. --- International Monetary Fund.
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This paper tests the importance of precautionary and mercantilist motives in accounting for the hoarding of international reserves by developing countries, and provides a model that quantifies the welfare gains from optimal management of international reserves. While the variables associated with the mercantilist motive are statistically significant, their economic importance in accounting for reserve hoarding is close to zero and is dwarfed by other variables. Overall, the empirical results are in line with the precautionary demand. The effects of financial crises have been localized, increasing reserve hoarding in the aftermath of crises mostly in countries located in the affected region, but not in other regions. We also investigate the micro foundation of precautionary demand, extending Diamond and Dybvig (1983)'s model to an open, emerging market economy where banks finance long-term projects with short-term deposits. We identify circumstances that lead to large precautionary demand for international reserves, providing self-insurance against the adverse output effects of sudden stop and capital flight shocks. This would be the case if premature liquidation of long-term projects is costly, and the economy is de-facto integrated with the global financial system, hence sudden stops and capital flight may reduce deposits sharply. We show that the welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude.
Fiscal policy --- Foreign exchange reserves. --- Econometric models
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Renminbi. --- Foreign exchange reserves. --- International Monetary Fund.
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Dollar, American. --- Foreign exchange reserves. --- Currency reserves, Foreign --- Foreign currency reserves --- Foreign reserves (Foreign exchange reserves) --- International reserves (Foreign exchange reserves) --- Reserves, Foreign exchange --- Finance, Public --- Reserves (Accounting) --- American dollar --- Money
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We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for significant holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.
Foreign exchange reserves. --- Risk --- Capital movements --- Default (Finance) --- Econometric models. --- Econometric models. --- Econometric models.
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Business cycles --- International Monetary Fund --- Foreign exchange reserves --- LDC / Developping Countries - Pays En Développement --- 333.111.42 --- 331.030 --- goudreserves en deviezenreserves. --- Conjunctuurschommelingen: algemeenheden. --- Working papers --- goudreserves en deviezenreserves --- Conjunctuurschommelingen: algemeenheden --- Foreign exchange reserves - Developing countries
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Foreign exchange reserves --- Government securities --- Foreign exchange rates --- Foreign exchange rates --- China --- United States --- Foreign economic relations --- Foreign economic relations
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Foreign exchange reserves --- Government securities --- Foreign exchange rates --- Foreign exchange rates --- China --- United States --- Foreign economic relations --- Foreign economic relations
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