Why do emerging economies borrow short term?

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

No 3389, Policy Research Working Paper Series from The World Bank

Abstract: The authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. They first 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 liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a tradeoff between safer long-term borrowing and cheaper short-term debt. Second, the authors construct a new database of sovereign bond prices and issuance. They 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 toward shorter maturities. This suggests that changes in bondholders' risk aversion are important to understand emerging market crises.

Keywords: Capital Flows; Capital Markets and Capital Flows; Economic Adjustment and Lending; International Trade and Trade Rules; Macro-Fiscal Policy; Public Finance Decentralization and Poverty Reduction; Public Financial Management; Public Sector Economics; Taxation & Subsidies (search for similar items in EconPapers)
Date: 2004-09-01
New Economics Papers: this item is included in nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

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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? (2006)
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