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Reserve uncertainty and the supply of international credit

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  • Reserve uncertainty and the supply of international credit
  • Aizenman, Joshua; Marion, Nancy
  • National Bureau of Economic Research


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Title Reserve uncertainty and the supply of international credit
Similar Titles
Material Type Reports
Author(English)

Aizenman, Joshua; Marion, Nancy

Publisher

Cambridge:National Bureau of Economic Research

Date 1999-07
Pages 26
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Economy < Macroeconomics
Holding National Bureau of Economic Research

Abstract

This paper examines how increased uncertainty about an emerging market's international reserves affects the willingness of foreign investors to supply international credits. We illustrate the relevance of this concern for South Korea during the recent financial crisis. Using available information about Korea's reserves at the onset of the crisis, we show that 'usable' reserves turned out to be much lower than what a reasonable forecast would have predicted. We then develop a model of an emerging-market economy where there is sovereign risk and moral hazard is a problem because agents expect the emerging market to bail out creditors with its reserves. We show that reserve uncertainty has a non-linear effect on the supply of credit. When the expected reserve position of an emerging market is large relative to the potential bailout in bad states of nature, reserve volatility does not matter. (The rest omitted)