International Reserve Management under Rollover Crises

Abstract:

This paper investigates how a government should manage international reserves when
it faces the risk of a rollover crisis. We ask, should the government accumulate reserves
or reduce debt to make itself less vulnerable? We show that the optimal policy entails
initially reducing debt, followed by a subsequent increase in both debt and reserves as
the government approaches a safe zone. Furthermore, we find that issuing additional
debt to accumulate reserves can lead to a reduction in sovereign spreads.