The Currency Composition of Sovereign Debt

Pablo Ottonello and Diego J. Perez

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 3, 174-208

Abstract: We study the currency composition of sovereign debt in emerging economies through the lens of a model in which the government lacks commitment regarding debt and monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through currency depreciation. Governments tilt the currency composition of debt toward foreign currency to avoid inflationary costs and real exchange rate distortions, at the expense of forgoing the hedging properties of local currency debt. Our quantitative model is used to shed light on the recent dynamics of the currency composition of debt and on its cyclical behavior.

JEL-codes: E31 E32 E52 F34 H63 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20180019
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Citations: View citations in EconPapers (45)

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Working Paper: The Currency Composition of Sovereign Debt (2016)
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