| HBS Working Paper Series
Debt Redemption, Reserve Accumulation, and Exchange-Rate Regimes
Foreign participation in local-currency-bond markets in emerging countries has increased dramatically over the past decade. In light of this trend, we revisit the question of the optimal exchange-rate regime when developing countries can borrow internationally with local-currency-denominated debt. We find that, as local-currency-bond markets develop, a "pseudo-flexible regime," whereby a country accumulates reserves in conjunction with debt, is the policy that most effectively stabilizes fluctuations under real external shocks.
Keywords: foreign reserves;
Currency Exchange Rate;
Developing Countries and Economies;