Inflation, Default, and the Currency Composition of Sovereign Debt in Emerging Economies: Working Paper 2017-01
No 52385, Working Papers from Congressional Budget Office
In emerging market economies, governments issue debt denominated both in their own currency and in foreign currencies. I develop a theory of the optimal composition of sovereign debt between local and foreign currencies. In a model with a micro-founded monetary framework a government controls monetary policy and has the ability to borrow from abroad using both local and foreign currency bonds. In this model, local currency bonds differ from foreign currency bonds in two important ways. Unlike foreign currency bonds, local currency bonds function as a contingent claim,
JEL-codes: F30 F33 (search for similar items in EconPapers)
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