Fiscal Rules and Optimal Currency Composition of Sovereign Debt in Emerging Economies

Oscar Valencia (), Luis Alberto Rodriguez and Juan Siachoque Campos

No 12682, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: Total public debt in most emerging markets grew before and after the pandemic with a sizable share in foreign currency. Along this trend, interest payments increased even in the presence of active fiscal rules in some countries. How should debt management of public debt be set under a fiscal rule? This document studies how optimal currency composition reduces the cost of debt and facilitates fiscal rule compliance but increases budget risk. Using a small open economy model, we provide evidence that optimal foreign currency holdings in Chile, Colombia, and Mexico depart considerably from observed; remaining low (high) in periods of favorable (adverse) external or domestic macroeconomic and financial conditions.

Keywords: sovereign debt management; scal rules; currency composition (search for similar items in EconPapers)
JEL-codes: E61 E62 H63 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:12682

DOI: 10.18235/0004723

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