Working Paper: NBER ID: w11952
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 percent 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 percent 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: No keywords provided
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Accumulation of reserves (E22) | Decrease in potential income (J17) |
| Higher levels of reserves (E49) | Lower probabilities of financial crises (G01) |
| Perceived need for liquidity (E41) | Decision to accumulate reserves (D25) |
| Accumulation of reserves (E22) | Financial stability (G28) |
| Reluctance to reduce short-term liabilities (G32) | Perceived benefits of such debt (F34) |