Why do emerging economies borrow short term?

Fernando Broner, Guido Lorenzoni () and Sergio Schmukler

No 3389, Policy Research Working Paper Series from The World Bank

Abstract: The authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. They first present a model where the debt maturity structure is the outcome of a risk-sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a tradeoff between safer long-term borrowing and cheaper short-term debt. Second, the authors construct a new database of sovereign bond prices and issuance. They show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting toward shorter maturities. This suggests that changes in bondholders'risk aversion are important to understand emerging market crises.

Keywords: Environmental Economics&Policies; International Terrorism&Counterterrorism; Economic Theory&Research; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Financial Intermediation; Public Sector Economics&Finance (search for similar items in EconPapers)
Date: 2004-09-01
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (72)

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Related works:
Journal Article: WHY DO EMERGING ECONOMIES BORROW SHORT TERM? (2013)
Working Paper: Why do emerging economies borrow short term? (2011)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2007)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2007)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2006)
Working Paper: Why Do Emerging Economies Borrow Short Term?
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