Working Paper: CEPR ID: DP5483
Authors: 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 represent 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.
Keywords: Emerging Markets; Financial Crises
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign exchange reserves (F31) | financial crises (G01) |
| Accumulation of reserves (E22) | social cost (D61) |
| Higher reserves (F31) | lower probability of financial crises (F65) |
| Accumulation of reserves (E22) | borrowing costs (H74) |