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The social cost of foreign exchange reserves

The social cost of foreign exchange reserves Abstract There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not seem too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Economic Journal Taylor & Francis

The social cost of foreign exchange reserves

International Economic Journal , Volume 20 (3): 14 – Sep 1, 2006
14 pages

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References (19)

Publisher
Taylor & Francis
Copyright
Copyright Korea International Economic Association
ISSN
1743-517X
eISSN
1016-8737
DOI
10.1080/10168730600879331
Publisher site
See Article on Publisher Site

Abstract

Abstract There has been a very rapid rise since the early 1990s in foreign reserves held by developing countries. These reserves have climbed to almost 30% of developing countries' GDP and 8 months of imports. Assuming reasonable spreads between the yield on reserve assets and the cost of foreign borrowing, the income loss to these countries amounts to close to 1% of GDP. Conditional on existing levels of short-term foreign borrowing, this does not seem too steep a price as an insurance premium against financial crises. But why developing countries have not tried harder to reduce short-term foreign liabilities in order to achieve the same level of liquidity (thereby paying a smaller cost in terms of reserve accumulation) remains an important puzzle.

Journal

International Economic JournalTaylor & Francis

Published: Sep 1, 2006

Keywords: Reserves,; external debt

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