The currency composition of sovereign debt

Pablo Ottonello, Diego J. Perez

    Research output: Contribution to journalArticle

    Abstract

    We study the currency composition of sovereign debt in emerging economies through the lens of a model in which the government lacks commitment regarding debt and monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through currency depreciation. Governments tilt the currency composition of debt toward foreign currency to avoid inflationary costs and real exchange rate distortions, at the expense of forgoing the hedging properties of local currency debt. Our quantitative model is used to shed light on the recent dynamics of the currency composition of debt and on its cyclical behavior.

    Original languageEnglish (US)
    Pages (from-to)174-208
    Number of pages35
    JournalAmerican Economic Journal: Macroeconomics
    Volume11
    Issue number3
    DOIs
    StatePublished - Jul 1 2019

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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