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Currency mismatch, uncertainty and debt maturity structure

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  • Bussière, Matthieu
  • Fratzscher, Marcel
  • Koeniger, Winfried

Abstract

The academic literature has so far little to say about the underlying causes of the large structural asset and liability imbalances of emerging markets that frequently contributed to financial crises. The aim of the paper is to contribute to filling this gap by proposing a theoretical model that links currency and maturity mismatches with real volatility in the economy. We show that if (i) a significant share of the debt is denominated in foreign currency-creating a currency mismatch- and (ii) borrowing is constrained by solvency, then currency mismatch can create and exacerbate a maturity mismatch. An important feature of the model is that higher economic or political uncertainty tightens solvency constraints and tilts the debt profile towards short term debt, thereby increasing the volatility of output. Taking the model implications to the data, we find empirical support for the model’s predictions using data for 28 emerging market economies. JEL Classification: F34, F36

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0409.

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Date of creation: Nov 2004
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Handle: RePEc:ecb:ecbwps:20040409

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Keywords: currency mismatch; debt; emerging markets; Maturity mismatch; uncertainty;

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Cited by:
  1. Asonuma, Tamon, 2014. "Sovereign defaults, external debt and real exchange rate dynamics," MPRA Paper 55133, University Library of Munich, Germany.
  2. Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.
  3. Uluc Aysun, 2006. "Capital Flows, Maturity Mismatches and Profitability in Emerging Markets: Evidence from Bank Level Data," Working papers 2006-29, University of Connecticut, Department of Economics, revised Oct 2007.

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