Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk

Javier Bianchi and Cesar Sosa-Padilla

No 27323, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. This paper proposes a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we argue that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. We show that issuing debt to purchase reserves during good times allows the government to stabilize aggregate demand when sovereign spreads rise and rolling over the debt becomes more expensive. We provide empirical evidence consistent with the model's predictions.

JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
Note: EFG IFM ME
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Citations: View citations in EconPapers (17)

Published as Javier Bianchi & César Sosa-Padilla, 2024. "Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk," Review of Economic Studies, vol 91(4), pages 2053-2103.

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Related works:
Journal Article: Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk (2024)
Working Paper: Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk (2020)
Working Paper: Reserve Accumulation, Macroeconomic Stabilization and Sovereign Risk (2018)
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