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The Currency Composition of Sovereign Debt†

The Currency Composition of Sovereign Debt† AbstractWe study the currency composition of sovereign debt in emerging economies through the lens of a model in which the government lacks commitment regarding debt and monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through currency depreciation. Governments tilt the currency composition of debt toward foreign currency to avoid inflationary costs and real exchange rate distortions, at the expense of forgoing the hedging properties of local currency debt. Our quantitative model is used to shed light on the recent dynamics of the currency composition of debt and on its cyclical behavior. (JEL E31, E32, E52, F34, H63) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

The Currency Composition of Sovereign Debt†

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20180019
Publisher site
See Article on Publisher Site

Abstract

AbstractWe study the currency composition of sovereign debt in emerging economies through the lens of a model in which the government lacks commitment regarding debt and monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through currency depreciation. Governments tilt the currency composition of debt toward foreign currency to avoid inflationary costs and real exchange rate distortions, at the expense of forgoing the hedging properties of local currency debt. Our quantitative model is used to shed light on the recent dynamics of the currency composition of debt and on its cyclical behavior. (JEL E31, E32, E52, F34, H63)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jul 1, 2019

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