Working Paper: NBER ID: w13216
Authors: Laura Alfaro; Fabio Kanczuk
Abstract: To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model that incorporates willingness-to-pay incentive problems. In this setup, debt and assets are not perfect substitutes, as reserves can be used even after a country has defaulted. We calibrate the model to a sample of emerging markets. We obtain that the reserve accumulation does not play a quantitatively important role in this model. In fact, the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.
Keywords: No keywords provided
JEL Codes: F32; F33; F34; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external shocks (F69) | sovereign's decision to hold reserves (F34) |
| level of reserves (Q30) | optimal debt policy (G32) |
| level of reserves (Q30) | output costs associated with default (G33) |
| holding reserves (E58) | willingness to pay on existing debt (G32) |
| holding reserves (E58) | cost of debt (G32) |
| reserves reduce output costs (D24) | optimal not to hold reserves (H21) |