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Why Do Emerging Economies Borrow in Foreign Currency?

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  • Mr. Olivier D Jeanne

Abstract

This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency. The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt. The paper presents some empirical evidence and discusses policy implications.

Suggested Citation

  • Mr. Olivier D Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 2003/177, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/177
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    More about this item

    Keywords

    WP; foreign currency; monetary policy; exchange rate; short-term debt; Foreign currency debt; Liability Dollarization; Monetary Credibility; currency composition; debt structure; results from a lack; debt contract; currency peg; long-term debt; dollar debt; Currencies; Domestic debt; Self-employment; Conventional peg; Southeast Asia;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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