Posted

August 13, 2013 11:45:43 AM

Date

2012-02

Author

Leonardo Martinez, Juan Hatchondo, and Javier Bianchi

Affiliation

International Monetary Fund, Federal Reserve Bank of Richmond, and New York University and University of Wisconsin

Title

Sovereign Defaults and Optimal Reserves Management

Summary /
Abstract

A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and foreign reserves. When calibrated to the data, the model can successfully explain the simultaneous holdings of debt and foreign reserves. We also show that the relationship between reserves and default risk may be non-monotonic.

Keywords

Sovereign default, optimal reserves management, international capital flows, external debt, foreign reserves

URL

http://www.economicdynamics.org/meetpapers/2012/paper_1125.pdf

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