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Local Currency Loans in the Global Development Finance Architecture

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  • Schclarek Curutchet Alfredo
  • Jiajun Xu

Abstract

We analyze how multilateral development banks (MDBs) can lend in local currency to investment projects that are “domestic-oriented” (DOIPs), i.e., which do not generate hard currency, without incurring in currency mismatches between their assets and liabilities, which would downgrade their credit ratings. Further, we compare two funding strategies for MDBs; one that involves buying local currency and one that involves issuing local currency bonds. The main policy conclusion is that there are tradeoffs between these two funding strategies and MDBs should consider the particular exchange rate risks and balance of payments crisis risks for the real investment projects that are financed and the host countries.

Suggested Citation

  • Schclarek Curutchet Alfredo & Jiajun Xu, 2023. "Local Currency Loans in the Global Development Finance Architecture," Asociación Argentina de Economía Política: Working Papers 4692, Asociación Argentina de Economía Política.
    • Handle: RePEc:aep:anales:4692
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    References listed on IDEAS

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    1. Stephany Griffith-Jones & Shari Spiegel & Jiajun Xu & Marco Carreras & Natalya Naqvi, 2022. "Matching Risks with Instruments in Development Banks," Review of Political Economy, Taylor & Francis Journals, vol. 34(2), pages 197-223, April.
    2. Schclarek, Alfredo & Xu, Jiajun, 2022. "Exchange rate and balance of payment crisis risks in the global development finance architecture," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    3. Perry Mehrling, 2012. "Three Principles for Market-Based Credit Regulation," American Economic Review, American Economic Association, vol. 102(3), pages 107-112, May.
    4. Brei, Michael & Schclarek, Alfredo, 2015. "A theoretical model of bank lending: Does ownership matter in times of crisis?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 298-307.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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