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Sovereign Risk, Currency Risk, and Corporate Balance Sheets

Author

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  • Wenxin Du
  • Jesse Schreger

Abstract

We provide a comprehensive account of the evolution of the currency composition of sovereign and corporate external borrowing by emerging markets from 2003 to 2017. We show that a higher reliance on foreign currency debt by the corporate sector is associated with higher sovereign default risk. We introduce local currency sovereign debt and private sector currency mismatch into a standard sovereign debt model to examine how the currency composition of corporate borrowing affects the sovereign’s incentive to inflate or default. A calibration of the model generates the empirical patterns of sovereign credit risk.

Suggested Citation

  • Wenxin Du & Jesse Schreger, 2022. "Sovereign Risk, Currency Risk, and Corporate Balance Sheets," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4587-4629.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:10:p:4587-4629.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac001
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    Citations

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    Cited by:

    1. Egemen Eren & Semyon Malamud & Haonan Zhou, 2023. "Signaling with debt currency choice," BIS Working Papers 1067, Bank for International Settlements.
    2. Kenneth Rogoff, 2022. "Emerging Market Sovereign Debt in the Aftermath of the Pandemic," Journal of Economic Perspectives, American Economic Association, vol. 36(4), pages 147-166, Fall.
    3. Si Guo & Yun Pei, 2023. "The impact of sovereign defaults on lending countries," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 345-374, January.
    4. Mert Onen & Hyun Song Shin & Goetz von Peter, 2023. "Overcoming original sin: insights from a new dataset," BIS Working Papers 1075, Bank for International Settlements.
    5. Rogoff, Kenneth, 2022. "Issues in the theory of sovereign debt and post-covid workouts," Journal of Policy Modeling, Elsevier, vol. 44(4), pages 804-811.
    6. Javier Bianchi & Louphou Coulibaly, 2023. "A Theory of Fear of Floating," Working Papers 796, Federal Reserve Bank of Minneapolis.
    7. Bryan Hardy & Goetz von Peter, 2023. "Global liquidity: a new phase?," BIS Quarterly Review, Bank for International Settlements, December.
    8. Florez-Orrego, Sergio & Maggiori, Matteo & Schreger, Jesse & Sun, Ziwen & Tinda, Serdil, 2023. "Global Capital Allocation," SocArXiv 5s6n3, Center for Open Science.
    9. Jieun Lee, 2023. "Dollar and government bond liquidity: evidence from Korea," BIS Working Papers 1145, Bank for International Settlements.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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