Why Do Emerging Economies Borrow in Foreign Currency?

Author/Editor:

Olivier D Jeanne

Publication Date:

September 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency. The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt. The paper presents some empirical evidence and discusses policy implications.

Series:

Working Paper No. 2003/177

Subject:

Conventional peg Currencies Domestic debt External debt Foreign currency debt Foreign exchange Labor Money Public debt Self-employment

English

Publication Date:

September 1, 2003

ISBN/ISSN:

9781451858891/1018-5941

Stock No:

WPIEA1772003

Pages:

38

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