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Currency mismatch, uncertainty and debt maturity structure

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Author Info
Matthieu Bussière () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Marcel Fratzscher () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Winfried Koeniger () (Institute for the Study of Labor (IZA), P.O. Box 7240, Schaumburg-Lippe Str. 7/9, D-53072 Bonn, Germany; Finance and Consumption in the EU, European University Institute.)

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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.

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Paper provided by European Central Bank in its series Working Paper Series with number 409.

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Length: 42 pages
Date of creation: Nov 2004
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Handle: RePEc:ecb:ecbwps:20040409

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Related research
Keywords: Maturity mismatch currency mismatch uncertainty debt emerging markets.

Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. Vincent Brousseau & Andrés Manzanares, 2005. "A look at intraday frictions in the euro area overnight deposit market," Working Paper Series 439, European Central Bank. [Downloadable!]
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