 Why Do Emerging Economies Borrow in Foreign Currency?No 2003/177, IMF Working Papers from International Monetary Fund Abstract: This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency. The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt. The paper presents some empirical evidence and discusses policy implications. Keywords: WP; foreign currency; monetary policy; exchange rate; short-term debt; Foreign currency debt; Liability Dollarization; Monetary Credibility; currency composition; debt structure; results from a lack; debt contract; currency peg; long-term debt; dollar debt; Currencies; Domestic debt; Self-employment; Conventional peg; Southeast Asia (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2003/177 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC. |
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