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  • June 2019
  • Article
  • IMF Economic Review

Debt Redemption and Reserve Accumulation

By: Laura Alfaro and Fabio Kanczuk
  • Format:Print
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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
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  • Doing Business in Boston, Massachusetts By: Laura Alfaro, Leonard A. Schlesinger and Zeke Gillman
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  • FIELD Immersion 2022: Lawrence, Massachusetts By: Laura Alfaro and Tom Quinn
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