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The social cost of foreign exchange reserves

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  • Dani Rodrik
Abstract
There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not seem too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

Suggested Citation

  • Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    • Handle: RePEc:taf:intecj:v:20:y:2006:i:3:p:253-266
    DOI: 10.1080/10168730600879331
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    More about this item

    Keywords

    Reserves; external debt;

    JEL classification:

    • F3 - International Economics - - International Finance

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