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Why Do Emerging Economies Borrow in Foreign Currency?

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  • Olivier Jeanne

Abstract

This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency. The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt. The paper presents some empirical evidence and discusses policy implications.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/177.

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Length: 38
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/177

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Keywords: Emerging markets; Borrowing; currency debt; foreign currency; foreign currency debt; domestic currency; currency composition; monetary policy; debt structure; sovereign debt; currency composition of debt; inflation; debt market; private debt; reserve bank; currency mismatches; domestic debt; real interest rate; international debt; debt contracts; foreign exchange; public debt; real interest rates; real value; central bank; currency mismatch; dollar value; short-term debt; currency risks; debt outstanding; domestic currencies; terms of debts; debt contract; domestic investors; domestic debts; currency debts; inflation rate; international lending; balance sheet effects; nominal interest rate; sovereign default; long-term debt;

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