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Currency Mismatch, Uncertainty and Debt Structure

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Author Info
Winfried Koeniger
Matthieu Bussiere
Marcel Fratzscher

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Abstract

The importance of currency and maturity mismatches in the debt structure of emerging markets is an issue that can hardly be overemphasized. Yet, while many papers have explained how imbalances in the asset and liability structure of emerging markets can cause currency and financial crises, the factors that may have triggered such imbalances in the first place have received relatively little attention so far. The aim of the paper is to contribute to fill this gap, both at a theoretical and empirical level. 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. In particular, higher economic or political uncertainty tightens solvency constraints and tilts the debt profile towards short-term debt. The combination of currency mismatch and maturity mismatch increases the volatility of output growth in the short-run. Taking the model implications to the data, we find substantial empirical support for the model's predictions using data for 30 open emerging market economies

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 181.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:181

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Related research
Keywords: maturity mismatch; currency mismatch; 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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