Currency Concentration in Sovereign Debt, Exchange Rate Cyclicality, and Volatility in Consumption

Eiji Fujii

No 10074, CESifo Working Paper Series from CESifo

Abstract: For emerging economies, borrowing abroad is a double-edged sword: it can buffer against adverse economic shocks and smooth their domestic consumption; however, it can also amplify volatility in consumption, depending on the currency in which the debt is denominated and cyclicality in the borrower’s exchange rate. We empirically investigate the nexus among external debt portfolios, exchange rate cyclicality, and volatility in consumption of low- and middle-income countries. Since 1980, many countries have concentrated their external debt portfolios’ currency composition. By constructing debt-weighted effective exchange rates, we find that currency concentration magnifies exchange rate pro-cyclicality, making domestic consumption more volatile when national income fluctuates. Our results endorse diversifying the currency composition of external debt to mitigate the negative consequences of “original sin.”

Keywords: external debt; currency portfolio; original sin; exchange rate cyclicality; volatility in consumption (search for similar items in EconPapers)
JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp10074.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable

Related works:
Journal Article: Currency concentration in sovereign debt, exchange rate cyclicality, and volatility in consumption (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10074

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().