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Title: |
The Social Cost of Foreign Exchange Reserves |
| Author: |
Rodrik, Dani |
| Author
Affiliation: |
Harvard University, Massachusetts, USA; |
| Source: |
International Economic Journal, September 2006, v. 20, no. 3, pp. 253-266 |
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Publication Date: |
September 2006 |
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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 percent 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 percent 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. |
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