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Reserves and Risk: Evidence from China

Working Paper
Rasmus Fatum, Takahiro Hattori and Yohei Yamamoto
Federal Reserve Bank of Dallas, Globalization Institute Working Paper 387, May 2020


We consider if the Chinese accumulation of reserves is associated with unintended consequences in the form of increased private sector risk taking. Using sovereign credit default swap spreads and stock index prices as indicators of risk taking, we provide evidence to suggest that as reserve holdings increase, so does the willingness of the private sector to take on more risk. This is an important finding that adds credence to the suggestion that insurance through costly reserves, to be used in the event of a crisis, may lead to private sector actions that in and of themselves make it more likely that this insurance will be used.