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  3. American Economic Journal: Macroeconomics
  4. July 2019
  5. The Currency Composition of Sovereign Debt

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

The Currency Composition of Sovereign Debt

  • Pablo Ottonello
  • Diego J. Perez
American Economic Journal: Macroeconomics
vol. 11, no. 3, July 2019
(pp. 174–208)
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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.

Citation

Ottonello, Pablo, and Diego J. Perez. 2019. "The Currency Composition of Sovereign Debt." American Economic Journal: Macroeconomics 11 (3): 174–208. DOI: 10.1257/mac.20180019

Additional Materials

JEL Classification

  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy
  • F34 International Lending and Debt Problems
  • H63 National Debt; Debt Management; Sovereign Debt