1
$\begingroup$

The following is an excerpt from Montiel's Macroeconomics in Emerging Markets (1st edition):

enter image description here

B: Privately owned bonds

DC: Government bonds held by the central bank

sB*: Bonds held by foreigners, valued in foreign currency

P(G - T): Primary deficit

i: Interest rate for privately owned bonds

i': Interest rate for bonds held by foreigners

sR*: Foreign reserves, valued in foreign currency

Δ: Variation

Foreign reserves are held by the central bank, not by the treasury. Then, why do variations in foreign reserves affect the government's budget constraint?

$\endgroup$
  • $\begingroup$ I'm not familiar with that book, and you haven't explained all the variables, but presumably if the gov't wants to pay some foreign bonds (which are valued in foreign currency in this model), it needs to take that foreign currency from somewhere, which is probably the central bank in this model, even if that's through a market-like transaction. Since this is an "emerging markets" context, perhaps the national currency is not assumed exchangchable to foreign currency, except domestically. $\endgroup$ – Fizz May 12 at 17:48
  • $\begingroup$ I have edited the question. The missing variables have been now explained. $\endgroup$ – Bruno Schiavo May 12 at 20:22
  • $\begingroup$ The government owns the central bank, so unless there is something else creating a wedge, the foreign bonds are ultimately owned by the government. $\endgroup$ – Brian Romanchuk May 14 at 10:53

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.