The Federal Reserve Board eagle logo links to Board's home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page A Theory of Rollover Risk, Sudden Stops, and Foreign Reserves
Sewon Hur and Illenin O. Kondo
2013-1073  (February 2013)

Abstract:  Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies.

Full paper (289 KB PDF)

Keywords
Rollover risk, reserves, sudden stops

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE


Home | IFDPs | List of 2013 IFDPs
Accessibility | Contact Us
Last update: March 25, 2013