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International Reserve Management Under Rollover Crises

Mauricio Barbosa-Alves¹; Javier Bianchi²; César Sosa-Padilla³

¹ University of Kentucky · ² Federal Reserve Bank of Minneapolis · ³ University of Notre Dame and National Bureau of Economic Research ,

Abstract This article investigates how a government should manage international reserves when it faces the risk of a rollover crisis. We ask: Should the government accumulate reserves or reduce debt to make itself less vulnerable? We show that the optimal policy entails initially reducing debt, followed by a subsequent increase in both debt and reserves as the government approaches a safe zone. Furthermore, we find that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads. Evidence from a panel of emerging economies is consistent with these predictions: increases in reserves financed by public external borrowing are associated with lower spreads, and reserve holdings are not systematically drawn down during crisis episodes.

DOI

10.1093/qje/qjag025

Volume

141 (3)

Pages

2269-2311

Language

en

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BibTeX

Sources

crossref openalex