The Theory of Reserve Accumulation, Revisited
Abstract
We develop a model in which optimizing governments hold international reserves to reduce disruptions from belief-driven hikes in borrowing costs, which originate from post-auction uncertainty about debt repayment. Accumulating reserves can eliminate these self-fulfilling cost hikes, allowing governments to issue debt along the fundamental price schedule and thereby improve consumption smoothing. Quantitatively, the model predicts average reserves of 2.2% of GDP for short-term debt, and a lower level of 0.4% for long-term debt, as longer maturities provide some protection against these self-fulfilling hikes by reducing refinancing needs.
Fields of Study & Subjects
Global Financial Crisis and Policies
Italy: Economic History and Contemporary Issues
Economic Policies and Impacts
Publication details
- Journal / source
- SSRN Electronic Journal
- Publisher
- Elsevier BV
- Publication date
- 1 January 2026
- Language
- EN
- Document type
- Preprint