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Why Do Emerging Economies Borrow Short Term?

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  • Fernando Broner
  • Guido Lorenzoni

    ()
    (Economics MIT)

  • Sergio Schmuckler

Abstract

We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is re‡ected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-o¤ between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that investor risk aversion is important to understand the debt structure in emerging economies

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 841.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:841

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Keywords: emerging market debt; financial crises; investor risk aversion;

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