Why Do Emerging Economies Borrow Short Term?

Fernando Broner, Guido Lorenzoni () and Sergio Schmuckler
Authors registered in the RePEc Author Service: Sergio Schmukler

No 841, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is re‡ected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-o¤ between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that investor risk aversion is important to understand the debt structure in emerging economies

Keywords: emerging market debt; financial crises; investor risk aversion (search for similar items in EconPapers)
JEL-codes: E43 F30 F32 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: WHY DO EMERGING ECONOMIES BORROW SHORT TERM? (2013)
Working Paper: Why do emerging economies borrow short term? (2011)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2007)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2007)
Working Paper: Why do emerging economies borrow short term? (2004)
Working Paper: Why Do Emerging Economies Borrow Short Term?
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