The social cost of foreign exchange reserves

Author: Rodrik, Dani

Source: International Economic Journal, Volume 20, Number 3, September 2006 , pp. 253-266(14)

Publisher: Routledge, part of the Taylor & Francis Group

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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% 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.

Keywords: Reserves; external debt

Document Type: Research article

DOI: http://dx.doi.org/10.1080/10168730600879331

Affiliations: 1: Harvard University, USA

Publication date: 2006-09-01