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Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk

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  • Javier Bianchi
  • César Sosa-Padilla
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.

Suggested Citation

  • Javier Bianchi & César Sosa-Padilla, 2020. "Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk," NBER Working Papers 27323, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27323
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    Cited by:

    1. Fang, Xiang & Hardy, Bryan & Lewis, Karen K., 2022. "Who Holds Sovereign Debt and Why It Matters," CEPR Discussion Papers 17338, C.E.P.R. Discussion Papers.
    2. Khan, Muhammad Tariq Iqbal & Anwar, Sofia, 2022. "Natural disasters and foreign exchange reserves: The role of renewable energy and human capital," Renewable Energy, Elsevier, vol. 192(C), pages 838-848.
    3. Johri, Alok & Khan, Shahed & Sosa-Padilla, César, 2022. "Interest rate uncertainty and sovereign default risk," Journal of International Economics, Elsevier, vol. 139(C).
    4. Javier Bianchi & Guido Lorenzoni, 2021. "The Prudential Use of Capital Controls and Foreign Currency Reserves," NBER Working Papers 29476, National Bureau of Economic Research, Inc.
    5. Javier Bianchi & Jorge Mondragon, 2022. "Monetary Independence and Rollover Crises," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(1), pages 435-491.
    6. Alexander Mihailov, 2022. "Editorial – Recent Trends in International Reserves: Theory and Evidence," Open Economies Review, Springer, vol. 33(5), pages 807-815, November.
    7. Sosa-Padilla, César & Sturzenegger, Federico, 2023. "Does it matter how central banks accumulate reserves? Evidence from sovereign spreads," Journal of International Economics, Elsevier, vol. 140(C).
    8. Alexander Mihailov & Harun Nasir, 2022. "Sudden Stops, Productivity and the Optimal Level of International Reserves for Small Open Economies," Open Economies Review, Springer, vol. 33(5), pages 825-851, November.
    9. Bianchi, Javier & Sosa-Padilla, César, 2024. "On wars, sanctions, and sovereign default," Journal of Monetary Economics, Elsevier, vol. 141(C), pages 62-70.
    10. Javier Bianchi, 2022. "The Research Agenda: Javier Bianchi on Financial Crises and Prudential Policies," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 23(1), April.
    11. Liu, Siming & Ma, Chang & Shen, Hewei, 2024. "Sudden stop with local currency debt," Journal of International Economics, Elsevier, vol. 148(C).
    12. Thibault Laurentjoye, 2022. "Foreign exchange reserves, imperfect substitutability of financial assets and the monetary policy quadrilemma," Working Papers PKWP2222, Post Keynesian Economics Society (PKES).
    13. Samano, Agustin, 2022. "International reserves and central bank independence," Journal of International Economics, Elsevier, vol. 139(C).
    14. Lutz, Flora & Zessner-Spitzenberg, Leopold, 2023. "Sudden stops and reserve accumulation in the presence of international liquidity risk," Journal of International Economics, Elsevier, vol. 141(C).

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    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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