Domestic versus External Borrowing and Fiscal Policy in Emerging Markets
Domestic public debt issued by emerging markets has risen significantly relative to international debt in recent years. Some recent empirical evidence also suggests that sovereigns have defaulted differentially on debt held by domestic and external creditors. Standard models of sovereign debt, however, mainly focus on how the actions of foreign creditors influence default decisions of sovereigns. Contrasting this one-sided focus, this paper adds to a new theoretical literature that points at the possibility of default on domestic debt and the consequences of doing so. It presents a model of an emerging market economy in which the government can selectively default on its domestic or external debt obligations. The model shows that the differential ability of domestic and foreign creditors to punish the government creates a gap in the expected default costs to the sovereign, and hence a differential in its propensity to default on its domestic versus foreign debt. The extent to which the possibility of differential treatment of creditors affects the composition of debt is explored. It shows that a country characterized by volatile output, sovereign risk, and costly tax collection will want to borrow in domestic markets as well as in international capital markets. The optimal allocation of debt between domestic and foreign creditors can thus be viewed as the government's purchase of insurance against macroeconomic shocks that affect its budget.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calvo, Guillermo A & Guidotti, Pablo E, 1992. "Optimal Maturity of Nominal Government Debt: An Infinite-Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 895-919, November.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Philippe Beaugrand & Montfort Mlachila & Boileau Loko, 2002. "The Choice Between External and Domestic Debt in Financing Budget Deficits; The Case of Central and West African Countries," IMF Working Papers 02/79, International Monetary Fund.
- Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
- Rose, Andrew K, 2002.
"One Reason Countries Pay Their Debts: Renegotiation and International Trade,"
CEPR Discussion Papers
3157, C.E.P.R. Discussion Papers.
- Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, vol. 77(1), pages 189-206, June.
- Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," EUI-RSCAS Working Papers 18, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," NBER Working Papers 8853, National Bureau of Economic Research, Inc.
- Andrew K. Rose, 2001. "One reason countries pay their debts: renegotiation and international trade," Staff Reports 142, Federal Reserve Bank of New York.
- Andrew K. Rose, 2002. "One Reason Countries Pay Their Debts: Renegotiation and International Trade," Working Papers 042002, Hong Kong Institute for Monetary Research.
- Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
- Bulow, J. & Rogoff, K., 1988.
"Sovereign Debt: Is To Forgive To Forget?,"
411, Stockholm - International Economic Studies.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
- Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
- Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2005.
"Sargent-Wallace meets Krugman-Flood-Garber, or: why sovereign debt swaps do not avert macroeconomic crises,"
Royal Economic Society, vol. 115(503), pages 343-367, 04.
- Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2002. "Sargent-Wallace Meets Krugman-Flood-Garber, or: Why Sovereign Debt Swaps Don't Avert Macroeconomic Crises," NBER Working Papers 9190, National Bureau of Economic Research, Inc.
- Henning Bohn, .
"A Positive Theory of Foreign Currency Debt,"
Rodney L. White Center for Financial Research Working Papers
19-88, Wharton School Rodney L. White Center for Financial Research.
- D. Woo & Simon Gray, 2000. "Reconsidering External Financing of Domestic Budget Deficits; Debunking Some Received Wisdom," IMF Policy Discussion Papers 00/8, International Monetary Fund.
- Manmohan S. Kumar & Pablo Emilio Guidotti, 1991. "Domestic Public Debt of Externally Indebted Countries," IMF Occasional Papers 80, International Monetary Fund.
- Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994.
"Optimal Fiscal Policy in a Business Cycle Model,"
Journal of Political Economy,
University of Chicago Press, vol. 102(4), pages 617-52, August.
- V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
- V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
- Harold L. Cole & Timothy J. Kehoe, 1998.
"Self-Fulfilling Debt Crises,"
Levine's Working Paper Archive
114, David K. Levine.
- Cohen Daniel, 1987. "External and domestic debt constraints of ldcs a theory with a numerical application to brazil and mexico," CEPREMAP Working Papers (Couverture Orange) 8710, CEPREMAP.
- Calvo, Guillermo A., 2000. "Betting against the state socially costly financial engineering," Journal of International Economics, Elsevier, vol. 51(1), pages 5-19, June.
- George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
- Patrick Bolton & Olivier Jeanne, 2005.
"Structuring and Restructuring Sovereign Debt: The Role of Seniority,"
NBER Working Papers
11071, National Bureau of Economic Research, Inc.
- Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers 4901, C.E.P.R. Discussion Papers.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2011.
"The Forgotten History of Domestic Debt,"
Royal Economic Society, vol. 121(552), pages 319-350, 05.
- Barry Eichengreen, 2003. "Restructuring Sovereign Debt," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 75-98, Fall.
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:07-33. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.