Reserve Accumulation, Macroeconomic Stabilization and Sovereign Risk

Javier Bianchi, Cesar Sosa Padilla

2019-06-03 - This paper examines the role of international reserves in a model of endogenous sovereign default with nominal rigidities. We show that in economies with limited Exchange rateflexibility, there is a role for reserves to manage macroeconomic stabilization. A calibrated version of the model predicts a large demand for reserves and can account for the differences in reserve accumulation for flexible and fixed exchange rates observed in the data. Finally, we show that issuing debt to accumulate reserves may not be costly in states in which stabilization benefits reduce incentives to default.