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Origins of the Maturity and Currency Mismatches in the Balance Sheet of Emerging Countries: a Theoretical Approach

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  • Irina Bunda

    ()
    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

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    Abstract

    The aim of this paper is to highlight the origins of the currency and maturity mismatches in the balance sheets of emerging countries. We show that short-term debt in the form of demandable debt works as a commitment device of the financial intermediary and as a form of protection of foreign lenders in a context of poor enforceability of contracts. The currency mismatch in the non-tradable sector is mainly viewed as a supply-side phenomenon. It results from the choice of foreign lenders whose anticipations of exchange rate risk overpass those of default of the banking and/or private sector following a real adverse shock. Finally, when it comes to simultaneously explain the maturity and the currency composition of debt, the paper shows that the short-term foreign currency denominated debt, with the option of early withdrawal of the demandable debt, allows investors to offset the debtor default risk if a currency depreciation occurs.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number halshs-00424465.

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    Date of creation: Jun 2003
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    Publication status: Published - Presented, Symposium on Banking and Monetary Economics, 2003, Birmingham, United Kingdom
    Handle: RePEc:hal:journl:halshs-00424465

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00424465/en/
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    Related research

    Keywords: maturity mismatch; currency mismatch; real exchange rate; international financial crises.;

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    1. Jeanne, Olivier, 2000. "Foreign currency debt and the global financial architecture," European Economic Review, Elsevier, vol. 44(4-6), pages 719-727, May.
    2. Diamond, Douglas W. & Rajan, Raghuram G., 2001. "Banks, short-term debt and financial crises: theory, policy implications and applications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 37-71, June.
    3. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises," IMF Working Papers 97/87, International Monetary Fund.
    4. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
    5. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    7. Jeanne, Olivier, 2000. "Debt Maturity and the Global Financial Architecture," CEPR Discussion Papers 2520, C.E.P.R. Discussion Papers.
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