Default of Depreciate

Yasin K rsat Nder () and Enes Sunel
Authors registered in the RePEc Author Service: Yasin Kursat Onder

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We propose a theory of domestic and foreign currency debt and limited commitment to exchange rate and debt repayment policies. We show that while exchange rate depreciation can be costly, it also reduces the real value of domestic-currency debt and helps smooth consumption without the repercussions of default. In times of exceptional liquidity strain, we demonstrate that the government can face lower bond spreads by inflating the local-currency debt through a moderate currency depreciation, even when the government’s ability to issue local-currency debt is constrained. Our model provides new insights into the long-held views of the "original sin" and its "redux".

Keywords: Sovereign default; inflationary bias; investor base; original sin redux (search for similar items in EconPapers)
JEL-codes: E31 F34 F45 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2021-08
New Economics Papers: this item is included in nep-dge, nep-isf, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:21/1023

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