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Risky public domestic debt composition in emerging economies

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  • Mehl, Arnaud
  • Reynaud, Julien

Abstract

This paper explains why public domestic debt composition in emerging economies can be risky, namely in foreign currency, with a short maturity or indexed. It analyses empirically the determinants of these risk sources separately, developing a new large dataset compiled from national sources for 33 emerging economies over 1994-2006. The paper finds that economic size, the breadth of the domestic investor base, inflation and fiscal soundness are all associated with risky public domestic debt compositions, yet to an extent that varies considerably in terms of magnitude and significance across sources of risk. Only inflation impacts all types of risky debt, underscoring the overarching importance of monetary credibility to make domestic debt compositions in emerging economies safer. Given local bond markets' rapid development, monitoring risky public domestic debt compositions in emerging economies becomes increasingly relevant to global financial stability.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 1 (February)
Pages: 1-18

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:1:p:1-18

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Public domestic debt Composition Risk Emerging economies;

References

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  1. Drudi, Francesco & Giordano, Raffaela, 2000. "Default risk and optimal debt management," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 861-891, June.
  2. Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
  3. Kevin Cowan & Eduardo Levy-Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt in the Americas: New Data and Stylized Facts," Working Papers Central Bank of Chile 371, Central Bank of Chile.
  4. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  5. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective," American Economic Review, American Economic Association, vol. 93(5), pages 1678-1702, December.
  6. Falcetti, Elisabetta & Missale, Alessandro, 2002. "Public debt indexation and denomination with an independent central bank," European Economic Review, Elsevier, vol. 46(10), pages 1825-1850, December.
  7. Fratzscher, Marcel & Bussière, Matthieu, 2004. "Financial openness and growth: short-run gain, long-run pain?," Working Paper Series 0348, European Central Bank.
  8. Hauner, David, 2009. "Public debt and financial development," Journal of Development Economics, Elsevier, vol. 88(1), pages 171-183, January.
  9. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 7.
  10. Anastasia Guscina & Olivier Jeanne, 2006. "Government Debt in Emerging Market Countries," IMF Working Papers 06/98, International Monetary Fund.
  11. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
  12. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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Cited by:
  1. Marcel Fratzscher & Arnaud Mehl & Isabel Vansteenkiste, 2011. "130 Years of Fiscal Vulnerabilities and Currency Crashes in Advanced Economies," IMF Economic Review, Palgrave Macmillan, vol. 59(4), pages 683-716, November.
  2. Serkan Arslanalp & Tigran Poghosyan, 2014. "Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies," IMF Working Papers 14/27, International Monetary Fund.
  3. Javier J. Pérez & Rocío Prieto, 2014. "The structure of sub-natural public debt: Liquidity vs credit risk," Banco de Espa�a Working Papers 1403, Banco de Espa�a.
  4. Wang, Alan T. & Yang, Sheng-Yung & Yang, Nien-Tzu, 2013. "Information transmission between sovereign debt CDS and other financial factors – The case of Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 586-601.

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