Heterogeneity in the impact of risk on local currency borrowing

Matthew Theobald ()
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Matthew Theobald: University of Wisconsin-Milwaukee

Indian Economic Review, 2023, vol. 58, issue 2, No 4, 319-357

Abstract: Abstract This paper uses quarterly public sector debt data for 19 countries from 2008 to 2021 to examine the relationship between inflation, credit, and currency risk with local currency borrowing, and if it is unique to specific subsamples. We find significant heterogeneity in risk correlations with borrowing across both high and low local currency borrowers, and monetary union status. Inflation risk is found to have a significant negative correlation for low non-EMU borrowers, largely made up of emerging markets, supporting the link between inflation volatility and countries who historically had difficulty borrowing in local currency. These significant effects are persistent into future periods. Heterogeneous correlations suggests unique links between risk measures and local currency borrowing for emerging markets and other subgroups, affecting potential policy discussions for shifting portfolios toward domestic currency.

Keywords: Local currency debt; Sovereign debt; International debt; Monetary union; Emerging market economies (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s41775-023-00176-x

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