THE CURRENCY DENOMINATION OF SOVEREIGN DEBT

Michael Bleaney

Discussion Papers from University of Nottingham, School of Economics

Abstract: This paper considers the currency composition of sovereign debt in the context of risk-sharing through excusable defaults. It is shown that monetary credibility is not a sufficient condition for borrowing in domestic currency. With real exchange rate risk, debt denominated in a borrowing country’s currency can be too state-contingent to support international lending on purely reputational considerations, even when debt denominated in the lending country’s currency is viable. The model can explain the geographical pattern of bond issuance, the phenomenon of “original sin”, and the concentration of defaults on foreign-currency debt.

Date: 2006-02
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mon and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:not:notecp:06/02

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