The Currency Denomination Of Sovereign Debt
AbstractThis paper considers the currency composition of sovereign debt in the context of risk-sharing through excusable defaults. It is shown that monetary credibility is not a sufficient condition for borrowing in domestic currency. With real exchange rate risk, debt denominated in a borrowing country’s currency can be too state-contingent to support international lending on purely reputational considerations, even when debt denominated in the lending country’s currency is viable. The model can explain the geographical pattern of bond issuance, the phenomenon of “original sin”, and the concentration of defaults on foreign-currency debt.
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Bibliographic InfoPaper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 06/02.
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-08 (All new papers)
- NEP-CBA-2006-04-08 (Central Banking)
- NEP-FMK-2006-04-08 (Financial Markets)
- NEP-MON-2006-04-08 (Monetary Economics)
- NEP-SEA-2006-04-08 (South East Asia)
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