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

<p><a href="https://i.sstatic.net/nqY8m.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/nqY8m.png" alt="enter image description here"></a></p>

<p>B: Privately owned bonds</p>

<p>DC: Government bonds held by the central bank</p>

<p>sB*: Bonds held by foreigners, valued in foreign currency</p>

<p>P(G - T): Primary deficit</p>

<p>i: Interest rate for privately owned bonds</p>

<p>i': Interest rate for bonds held by foreigners</p>

<p>sR*: Foreign reserves, valued in foreign currency</p>

<p>Δ: Variation</p>

<p>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? </p>

CC BY-SA 4.0
2019-05-12T17:48:46.023Z
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.
fantastic peace and prosperity
CC BY-SA 4.0
2019-05-12T20:22:55.810Z
I have edited the question. The missing variables have been now explained.
Incognito
CC BY-SA 4.0
2019-05-14T10:53:50.613Z
The government owns the central bank, so unless there is something else creating a wedge, the foreign bonds are ultimately owned by the government.
Brian Romanchuk
<national-accounts>
Foreign exchange reserves in the government's budget constraint
Incognito
# Foreign exchange reserves in the government's budget constraint

(Asked by: username_0 on 2019-05-12)

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

[![enter image description here](https://i.sstatic.net/nqY8m.png)](https://i.sstatic.net/nqY8m.png)

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?

**Tags:** national-accounts
> **Comments:**
> **username_1**: 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.  
> **username_0**: I have edited the question. The missing variables have been now explained.  
> **username_2**: The government owns the central bank, so unless there is something else creating a wedge, the foreign bonds are ultimately owned by the government.  

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