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Publications
Publications
  • June 2019
  • Article
  • IMF Economic Review

Debt Redemption and Reserve Accumulation

By: Laura Alfaro and Fabio Kanczuk
  • Format:Print
  • | Pages:27
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Abstract

In the past decade, foreign participation in local-currency bond markets in emerging countries increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can accumulate reserves and borrow internationally using their own currency. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and render consumption smoother. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.

Keywords

Sovereign Debt; Local-currency Bonds; Foreign Reserves; Sovereign Finance; Borrowing and Debt; Bonds; Financial Markets; Developing Countries and Economies

Citation

Alfaro, Laura, and Fabio Kanczuk. "Debt Redemption and Reserve Accumulation." IMF Economic Review 67, no. 2 (June 2019): 261–287. (Also NBER Working Paper No. 19098.)
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About The Author

Laura Alfaro

General Management
→More Publications

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More from the Authors
  • Global Supply Chains: The Looming 'Great Reallocation' By: Laura Alfaro and Davin Chor
  • Urgent: The IMF Must Reform By: Laura Alfaro, Guillermo Calvo, José de Gregorio, Augusto de la Torre, Roque Fernandez, Pablo Guidotti, Enrique Mendoza, Ernesto Talvi, Liliana Rojas-Suarez and Andrés Velasco
  • The Real Exchange Rate, Innovation and Productivity By: Laura Alfaro, Alejandro Cuñat, Harald Fadinger and Yanping Liu
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