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Optimal Currency Composition of Foreign Debt: The Case of Five Developing Countries

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  • Pier Giorgio Gawronski

Abstract

Many developing countries lack access to future and option markets to hedge the enormous risks arising from the currency exposure of their foreign debt. And even if these markets are accessible, their maturities are often too short compared to the maturities of long-term debt. The important hedging instrument available for any country, however, is the currency mix of foreign debt itself. This paper provides a theory for the optimal currency composition of foreign debt for market constrained developing countries. It also develops the empirical methodology to determine the optimal currency mix which is then applied. Applying the method to Brazil, Indonesia, Mexico, the Philippines and South Korea, the optimal mix is compared to alternative currency compositions, both in terms of foreign exchange gains and losses as well as variability of balance of payments flows ... De nombreux pays en développement manquent d'accès aux marchés à terme et d'options pour se protéger des énormes risques liés à la précarité de leur monnaie due à leur dette extérieure. Même quand ces marchés leur sont accessibles, les échéances sont souvent trop brèves au regard de celles de leur dette à long terme. L'association de différentes monnaies constitue cependant un efficace moyen de protection pour tous ces pays. Cette étude présente une analyse de la composition monétaire idéale de la dette extérieure pour les pays en développement contraints de la négocier sur le marché financier. Elle définit également une méthodologie empirique destinée à déterminer la composition monétaire optimale. Son application au Brésil, à l'Indonésie, au Mexique, aux Philippines et à la Corée du Sud permet de comparer cette composition optimale à d'autres compositions monétaires, à la fois sur le plan des gains et des pertes dans le domaine des échanges extérieurs et sur celui des variations ...

Suggested Citation

  • Pier Giorgio Gawronski, 1990. "Optimal Currency Composition of Foreign Debt: The Case of Five Developing Countries," OECD Development Centre Working Papers 23, OECD Publishing.
  • Handle: RePEc:oec:devaaa:23-en
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    File URL: http://dx.doi.org/10.1787/021451754503
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    Cited by:

    1. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.
    2. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    3. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.

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