Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy

Wenxin Du, Carolin Pflueger and Jesse Schreger

No 22592, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively counter-cyclical inflation ex post, which leads risk-averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.

JEL-codes: E4 F3 G12 G15 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon, nep-opm and nep-sog
Note: AP IFM
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Citations: View citations in EconPapers (16)

Published as WENXIN DU & CAROLIN E. PFLUEGER & JESSE SCHREGER, 2020. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy," The Journal of Finance, vol 75(6), pages 3097-3138.

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