Sovereign Risk, Currency Risk, and Corporate Balance Sheets

Wenxin Du () and Jesse Schreger ()
Additional contact information
Wenxin Du: Federal Reserve Board
Jesse Schreger: Harvard Business School, Business, Government and the International Economy Unit

No 17-024, Harvard Business School Working Papers from Harvard Business School

Abstract: We construct a new dataset of 14 emerging markets and show that sovereigns increasingly borrow from foreigners in local currency but the private sector continues to borrow in foreign currency. We show that a higher reliance on foreign currency corporate financing is associated with more sovereign default risk. We introduce local currency sovereign debt and private 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 currency and sovereign credit risk over the last decade.

Pages: 68 pages
Date: 2016-09
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:hbs:wpaper:17-024

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