Working Paper: NBER ID: w25909
Authors: Joshua Aizenman; Yothin Jinjarak
Abstract: This paper outlines a tractable cost-benefit analysis of the buffer stock financial services provided by international reserves and applies it to 8 of the largest Emerging Markets (BRICS, Indonesia, Mexico, Turkey) during 2000-2019. The efficient management of international reserves generates sizable benefits for countries characterized by hard-currency external debt. These benefits increase with the volatility of the real exchange rates and sovereign spreads. While the first-best policy calls for prudential regulations, counter-cyclical management of hoarding reserves in good times and selling them in bad times provides buffers stock financial services adding up to about 3% of GDP during our sample period.
Keywords: International Reserves; Financial Stability; Emerging Markets; Sovereign Spreads; Real Exchange Rates
JEL Codes: F31; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| management of international reserves (F33) | financial buffer services (G20) |
| volatility of real exchange rates (F31) | benefits of maintaining reserves (Q26) |
| short-term borrowing matched by increase in reserves (F32) | net effect of opportunity cost of reserves (F31) |
| sovereign spread (G15) | marginal benefit of selling one reserve dollar (F31) |
| real exchange rate (F31) | marginal benefit of selling one reserve dollar (F31) |
| adverse economic conditions (E66) | utilization of reserves (H56) |
| IR hoarding (H26) | improvements in financial conditions (G28) |
| international reserves (IR) (F33) | financial stability (G28) |