## _wp0698

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---

### I. Introduction
- Research objective: present a new data set on the structure of government debt in emerging market countries and provide stylized facts and preliminary evidence on determinants.
- Key motivation: “dangerous” forms of debt (especially short-term and/or foreign-currency debt) increase emerging market vulnerability to crises.
- Comparative focus: domestic debt structure is more variable and informative across countries than international debt, which is often medium maturity and denominated in a foreign currency.
- Data collection undertaken in the Research Department of the International Monetary Fund in 2004–05.

### II. Scope and Coverage
- Coverage: debt of the central government in 19 countries (6 in Latin America, 7 in Asia, 4 transition countries plus Israel and Turkey).
- Frequency and period:
  - Annual data on government debt starting in 1980.
  - International debt available annually for all countries over the period 1980–2002.
  - For domestic debt in the four transition countries (Czech Republic, Hungary, Poland, and Russia), data were available only after 1992 or 1993.
- Focus: central government debt (local governments and public enterprises generally excluded).
- Exception: Chile — domestic debt of the central bank included because the Central Bank of Chile has issued large amounts of debt on behalf of the government.
- Note: international debt of central banks included; domestic debt of central banks generally excluded.

### III. Construction and Methodology
- Primary distinction: domestic debt versus international debt defined by jurisdiction of issuance (domestic = issued domestically; international = issued under a foreign jurisdiction); differs from IFS or GDF definitions that use residency of the debt holder.
- Data sources: national sources (authorities’ web sites, publications), complemented by information from national authorities and IMF desk economists/resident representatives.
- Frequency of recording: data recorded at quarterly or monthly frequency when available; analyses use annual data.
- Instrument-level approach: for each country, all government debt instruments since 1980 listed and characterized by maturity, currency composition, indexation, interest rate, and outstanding stocks.
- Further details and source descriptions referenced in Jeanne and Guscina (2006).

### IV. Definitions and Debt Characteristics Captured
- Three primary characteristics recorded for domestic debt:
  1. Maturity:
     - short-term: original maturity of one year or less
     - medium-term: original maturity between one and five years
     - long-term: original maturity longer than five years
  2. Denomination/indexation of the principal:
     - local currency
     - foreign currency (generally the U.S. dollar)
     - a price index (generally a consumption price index)
     - Classification rule: the unit determining the value of the repayment matters (e.g., debt denominated in local currency but indexed to a foreign currency is counted as foreign currency debt).
  3. Also recorded: indexation and interest rate characteristics and outstanding stocks at instrument level.

### V. Comparative Advantages of the Database
- Integrates domestic and international debt in a comparable way across countries.
- Temporal depth: starts in 1980 (except for transition countries).
- High level of detail on domestic debt structure with a breakdown in 18 different categories.

### VI. Structure of Domestic Debt — Empirical Regularities and Illustration (Mexico, 2000)
- Debt classification crosses maturity, indexation/denomination of principal, and interest-rate type yielding 18 different debt categories.
- Table 2 (Mexico, 2000) — outstanding central government domestic debt (in percent):
  - Domestic Currency Fixed Interest Rate: Short Term 24.93; Medium Term 4.86; Long Term 0.00
  - Domestic Currency Variable Interest Rate: Short Term 0.00; Medium Term 49.32; Long Term 0.00
  - Foreign Currency Fixed Interest Rate: Short Term 0.00; Medium Term 0.00; Long Term 0.00
  - Foreign Currency Variable Interest Rate: Short Term 0.00; Medium Term 0.00; Long Term 0.00
  - Indexed Fixed Interest Rate: Short Term 0.00; Medium Term 10.10; Long Term 10.78
  - Indexed Variable Interest Rate: Short Term 0.00; Medium Term 0.00; Long Term 0.00
- Key empirical facts:
  - The dominant category across the sample is domestic-currency, long-term debt with a fixed interest rate (DLTF debt).
  - The only category not represented at all is short-term indexed debt with a variable interest rate.
  - Very little foreign-currency debt, indexed debt, or variable-interest-rate debt with short maturity (for example, less than 3 percent of the indexed debt is short-term).
  - Most short-term debt consists of Treasury bills denominated in domestic currency with a fixed interest rate; notable exceptions (e.g., Mexican Tesobonos in 1994 amounted to 70 percent of Mexican short-term debt).
- Regional heterogeneity:
  - Asia’s domestic-debt structure resembles advanced countries: overwhelming share of DLTF debt.
  - Latin America: DLTF debt less prevalent, and most DLTF debt that exists tends to be short-term; the share of DLTF debt in total debt is lower and declined over time in Latin America.
  - Countries with average DLTF share < 50 percent show varied experiences: some specialize (e.g., Israel on indexed debt, Argentina on foreign-currency debt) while others diversify (e.g., Brazil, Mexico, Turkey).

### VII. Domestic versus International Debt: Patterns and Correlates
- Cross-regional comparison:
  - The ratio of total central government debt to GDP does not differ much between Latin America, Asia, and the advanced economies.
  - Latin America relied less on domestic debt than Asia and developed countries.
  - The share of Latin America’s debt that was domestically issued increased by 15 percent between 1988 and 2002.
- Correlates of higher domestic-debt shares (rough, graphical evidence):
  - Positive correlation between share of domestic debt and average ratio of M2 to GDP — suggesting larger banking sectors help governments sell debt domestically.
  - Positive correlation between share of domestic debt and stock market capitalization as a share of GDP.
  - No clear positive correlation between private savings rate and reliance on domestic debt; absence of correlation persists if official debt is excluded.

### VIII. Monetary Instability, “Domestic Original Sin,” and DLTF Debt
- Hypothesis: Monetary instability reduces governments’ ability to issue DLTF debt because it generates uncertainty in real repayment values.
- Empirical approach:
  - Correlate DLTF share with inflation; use average inflation as proxy for volatility (level is closely correlated with volatility).
  - Plot average share of DLTF debt in a decade against average inflation in the previous decade for 1980s, 1990s, and 2000–04 (keeping countries with 20 years of data).
- Descriptive evidence:
  - In the 1980s, DLTF debt had virtually disappeared in Argentina and Chile (countries with more than 100 percent average inflation in the 1970s).
  - High inflation in the 1980s led to disappearance of DLTF debt in Brazil and Mexico in the following decade.
  - Turkey: inflation averaged 49 percent but without hyperinflationary peaks; DLTF share declined from 66 percent in 1980 to 29 percent in 2004.
  - Return to monetary stability in the 1990s did not restore DLTF debt significantly in countries previously curtailed by instability; 2000–04 DLTF shares remained insignificant in Brazil, Argentina, Chile, and relatively small in Israel and Mexico despite single-digit average inflation in the 1990s.
  - Recent pick-up in DLTF share in Mexico and Israel after one decade of low inflation suggests partial recovery is possible.

### IX. Panel Regression Evidence on Inflation and DLTF Debt (Table 3)
- Dependent variable: Share of DLTF debt in domestic debt (in percent).
- Regression 1:
  - Lagged share of DLTF debt: 0.92 (0.025)***
  - Dummy for inflation>100% in previous decade: -7.03 (2.267)***
- Regression 2 (adds interaction term):
  - Lagged share of DLTF debt: 0.96 (0.012)***
  - Dummy for inflation>100% in previous decade: -2.01 (1.146)*
  - Lagged share times inflation dummy: -0.26 (0.095)***
- Notes:
  - Standard errors in parenthesis.
  - Data sources: DLTF debt from Jeanne-Guscina database; inflation from IFS and GFD.
  - Country fixed effects were not significant and were omitted.
  - Interpretation: statistically significant negative impact of past high inflation on DLTF share; the large coefficient on the lagged dependent variable indicates persistence but less than 1 implies no hysteresis. Interaction term suggests DLTF debt is quicker to disappear with high inflation than to reappear with low inflation.

### X. Quantitative Scenario: Impulse Response to Severe Inflationary Shock
- Scenario simulated: an inflationary shock that raises the inflation rate above the 100 percent threshold for three years in a row, starting from a situation where DLTF debt amounts to 80 percent of total domestic debt.
- Impulse-response findings (authors’ description):
  - The impact of inflation is quantitatively large and persistent.
  - Under Regression 2, DLTF debt virtually disappears 10 years after the end of the inflationary shock and remains at only half of its initial level after 30 years.

### XI. Conclusions and Research Agenda
- Summary of findings:
  - Large variation exists in domestic-debt structure across countries and over time.
  - Some emerging market countries (notably in Asia) have debt structures similar to advanced countries with high shares of long-term domestic-currency debt; others (notably in Latin America) have low shares of long-term domestic-currency debt.
  - Evidence indicates a relationship between historical monetary instability and reduced capacity to issue DLTF debt.
- Suggested avenues for future research and data augmentation:
  - Investigate determinants of choice between CPI-indexed, short-term debt and foreign-currency debt where DLTF debt is curtailed.
  - Augment the database with interest-rate series by instrument to:
    - Estimate supply and demand systems for different types of debt.
    - Measure interest rate premia on new debt instruments.
    - Assess benefits of large and liquid markets and microeconomic mechanisms of domestic debt market development.

*Source: _wp0698 - 3. Fixed or variable interest rate.*

### References..............................................................................................................

### _wp0698 - References

### I. Introduction
- Research objective: present a new data set on the structure of government debt in emerging market countries and provide stylized facts and preliminary evidence on determinants.
- Key motivation: “dangerous” forms of debt (especially short-term and/or foreign-currency debt) increase emerging market vulnerability to crises.
- Comparative focus: domestic debt structure is more variable and informative across countries than international debt, which is often medium maturity and denominated in a foreign currency.
- Data collection undertaken in the Research Department of the International Monetary Fund in 2004–05.

### II. Scope and Coverage
- Coverage: debt of the central government in 19 countries.
  - Composition: 6 in Latin America, 7 in Asia, 4 transition countries plus Israel and Turkey.
- Frequency and period:
  - Annual data on government debt starting in 1980.
  - International debt available annually for all countries over the period 1980–2002.
  - For domestic debt in the four transition countries (Czech Republic, Hungary, Poland, and Russia), data were available only after 1992 or 1993.
- Focus: central government debt (local governments and public enterprises generally excluded).
- Exception: Chile — domestic debt of the central bank included because the Central Bank of Chile has issued large amounts of debt on behalf of the government.
- Note on inclusion of central bank debt: international debt of central banks included; domestic debt of central banks generally excluded.

### III. Construction and Methodology
- Primary distinction: domestic debt versus international debt defined by jurisdiction of issuance (domestic = issued domestically; international = issued under a foreign jurisdiction).
  - This differs from IFS or GDF definitions that use residency of the debt holder.
- Data sources: national sources (authorities’ web sites, publications), complemented by information from national authorities and IMF desk economists/resident representatives.
- Frequency of recording: data were recorded at quarterly or monthly frequency when available, but analyses in the paper use annual data.
- Instrument-level approach: for each country, all government debt instruments since 1980 were listed and characterized by maturity, currency composition, indexation, interest rate, and outstanding stocks.
- Further details and source descriptions are referenced as available in Jeanne and Guscina (2006).

### IV. Definitions and Debt Characteristics Captured
- Three primary characteristics recorded for domestic debt:
  1. Maturity:
     - short-term: original maturity of one year or less
     - medium-term: original maturity between one and five years
     - long-term: original maturity longer than five years
  2. Denomination/indexation of the principal:
     - local currency
     - foreign currency (generally the U.S. dollar)
     - a price index (generally a consumption price index)
     - Classification rule: what matters is the unit determining the value of the repayment (e.g., debt denominated in local currency but indexed to a foreign currency is counted as foreign currency debt).
  3. (Also recorded) indexation and interest rate characteristics and outstanding stocks at instrument level.

### V. Comparative Advantages of the Database
- Integrates domestic and international debt in a comparable way across countries.
- Temporal depth: starts in 1980 (except for transition countries).
- High level of detail on domestic debt structure with a breakdown in 18 different categories.

### VI. Research Agenda and Context
- The database enables research into why some countries develop “risky” domestic debt structures and which policies may promote safer debt structures (e.g., long-term, domestic-currency debt).
- The paper situates this dataset relative to prior sources:
  - Existing comprehensive external debt data: World Bank Debtor Reporting System (DRS) / Global Development Finance (GDF).
  - Prior work on domestic debt markets: Missale (1999) for 18 OECD countries; BIS statistics on domestic debt securities (limited structure detail); JP Morgan’s Guide to Local Markets (1998, 2000, 2002); Mehl and Reynaud (2005); Christensen (2005); Cowan and others (2006); Kamil (2006).

*Source: _wp0698 - References*

### 3. Fixed or variable interest rate.

### _wp0698 - 3. Fixed or variable interest rate.

### Debt classification and Mexico, 2000 (illustrative)
- Crossing maturity, indexation/denomination of principal, and interest-rate type yields 18 different debt categories.
- Table 2 (Mexico, 2000) — outstanding central government domestic debt (in percent):
  - Domestic Currency Fixed Interest Rate: Short Term 24.93; Medium Term 4.86; Long Term 0.00
  - Domestic Currency Variable Interest Rate: Short Term 0.00; Medium Term 49.32; Long Term 0.00
  - Foreign Currency Fixed Interest Rate: Short Term 0.00; Medium Term 0.00; Long Term 0.00
  - Foreign Currency Variable Interest Rate: Short Term 0.00; Medium Term 0.00; Long Term 0.00
  - Indexed Fixed Interest Rate: Short Term 0.00; Medium Term 10.10; Long Term 10.78
  - Indexed Variable Interest Rate: Short Term 0.00; Medium Term 0.00; Long Term 0.00

### Domestic versus international debt: patterns and correlates
- Cross-regional comparison:
  - The ratio of total central government debt to GDP does not differ much between Latin America, Asia, and the advanced economies.
  - There are significant differences in reliance on domestic debt: Latin America relied less on domestic debt than Asia and developed countries.
  - The share of Latin America’s debt that was domestically issued increased by 15 percent between 1988 and 2002.
- Correlates of higher domestic-debt shares (rough, graphical evidence):
  - Positive correlation between share of domestic debt and average ratio of M2 to GDP — suggesting larger banking sectors help governments sell debt domestically.
  - Positive correlation between share of domestic debt and stock market capitalization as a share of GDP.
  - No clear positive correlation between private savings rate and reliance on domestic debt; absence of correlation persists if official debt is excluded.

### Structure of domestic debt (empirical regularities)
- Construction: Figure 6 computed share of each of the 18 categories in domestic debt for each country-year and averaged across all countries and years; the 18 bars sum to 100 percent.
- Key empirical facts:
  - The dominant category across the sample is domestic-currency, long-term debt with a fixed interest rate (DLTF debt).
  - Some categories are rare or absent: the only category not represented at all is short-term indexed debt with a variable interest rate.
  - Very little foreign-currency debt, indexed debt, or variable-interest-rate debt with short maturity (for example, less than 3 percent of the indexed debt is short-term).
  - Most short-term debt consists of Treasury bills denominated in domestic currency with a fixed interest rate; notable exceptions exist (e.g., Mexican Tesobonos in 1994 amounted to 70 percent of Mexican short-term debt).
- Regional heterogeneity:
  - Asia’s domestic-debt structure resembles advanced countries: overwhelming share of DLTF debt.
  - Latin America: DLTF debt less prevalent, and most DLTF debt that exists tends to be short-term; the share of DLTF debt in total debt is lower and declined over time in Latin America.
  - Countries with average DLTF share < 50 percent show varied experiences: some specialize (e.g., Israel on indexed debt, Argentina on foreign-currency debt) while others diversify (e.g., Brazil, Mexico, Turkey).

### Monetary instability and “domestic original sin”
- Hypothesis: Monetary instability reduces governments’ ability to issue long-term domestic-currency debt (DLTF), because it generates uncertainty in real repayment values.
- Empirical approach:
  - Correlate DLTF share with inflation; use average inflation as proxy for volatility (level is closely correlated with volatility).
  - Plot average share of DLTF debt in a decade against average inflation in the previous decade for 1980s, 1990s, and 2000–04 (keeping countries with 20 years of data).
- Descriptive evidence:
  - In the 1980s, DLTF debt had virtually disappeared in Argentina and Chile (countries with more than 100 percent average inflation in the 1970s).
  - High inflation in the 1980s led to disappearance of DLTF debt in Brazil and Mexico in the following decade.
  - Turkey: inflation averaged 49 percent but without hyperinflationary peaks; DLTF share declined from 66 percent in 1980 to 29 percent in 2004.
  - Return to monetary stability in the 1990s did not restore DLTF debt significantly in countries previously curtailed by instability; 2000–04 DLTF shares remained insignificant in Brazil, Argentina, Chile, and relatively small in Israel and Mexico despite single-digit average inflation in the 1990s.
  - Recent pick-up in DLTF share in Mexico and Israel after one decade of low inflation suggests partial recovery is possible.

### Panel regression evidence on inflation and DLTF debt (Table 3)
- Dependent variable: Share of DLTF debt in domestic debt (in percent).
- Regression 1:
  - Lagged share of DLTF debt: 0.92 (0.025)***
  - Dummy for inflation>100% in previous decade: -7.03 (2.267)***
- Regression 2 (adds interaction term):
  - Lagged share of DLTF debt: 0.96 (0.012)***
  - Dummy for inflation>100% in previous decade: -2.01 (1.146)*
  - Lagged share times inflation dummy: -0.26 (0.095)***
- Notes from regressions:
  - Standard errors in parenthesis.
  - Data sources: DLTF debt from Jeanne-Guscina database; inflation from IFS and GFD.
  - Country fixed effects were not significant and were omitted.
  - Interpretation: statistically significant negative impact of past high inflation on DLTF share; the large coefficient on the lagged dependent variable indicates persistence but less than 1 implies no hysteresis. Interaction term suggests DLTF debt is quicker to disappear with high inflation than to reappear with low inflation.

### Quantitative scenario: impulse response to severe inflationary shock
- Scenario simulated: an inflationary shock that raises the inflation rate above the 100 percent threshold for three years in a row, starting from a situation where DLTF debt amounts to 80 percent of total domestic debt.
- Impulse-response findings (authors’ description):
  - The impact of inflation is quantitatively large and persistent.
  - Under Regression 2, DLTF debt virtually disappears 10 years after the end of the inflationary shock and remains at only half of its initial level after 30 years.

### Conclusions and research agenda
- Summary of findings:
  - Large variation exists in domestic-debt structure across countries and over time.
  - Some emerging market countries (notably in Asia) have debt structures similar to advanced countries with high shares of long-term domestic-currency debt; others (notably in Latin America) have low shares of long-term domestic-currency debt.
  - Evidence indicates a relationship between historical monetary instability and reduced capacity to issue DLTF debt.
- Suggested avenues for future research and data augmentation:
  - Investigate determinants of choice between CPI-indexed, short-term debt and foreign-currency debt where DLTF debt is curtailed.
  - Augment the database with interest-rate series by instrument to:
    - Estimate supply and demand systems for different types of debt.
    - Measure interest rate premia on new debt instruments.
    - Assess benefits of large and liquid markets and microeconomic mechanisms of domestic debt market development.

*Source: Jeanne-Guscina EM Debt Database 2006; content as presented in _wp0698 - 3. Fixed or variable interest rate.*

### REFERENCES

### REFERENCES

### Sovereign debt structure and public debt management
- Borensztein, Eduardo, Marcos Chamon, Olivier Jeanne, Paolo Mauro, and Jeromin Zettelmeyer, 2004, Sovereign Debt Structure for Crisis Prevention, IMF Occasional Paper No. 237 (Washington: International Monetary Fund).
- Missale, Alessandro, 1999, Public Debt Management (Oxford: Oxford University Press).
- International Monetary Fund, 2003, “Public Debt in Emerging Markets: Is It Too High?” Chapter III of World Economic Outlook, September 2003 (Washington, International Monetary Fund).
- Goldstein, Morris, and Philip Turner, 2004, Controlling Currency Mismatches In Emerging Markets (Washington: Institute for International Economics).

### Original sin, currency composition, and balance-sheet issues
- Hausmann, Ricardo, and Ugo Panizza, 2003, “On the Determinants of Original Sin: an Empirical Investigation,” Journal of International Money and Finance, Vol. 22, pp. 957–90.
- Eichengreen, Barry, and Ricardo Hausmann, 1999, “Exchange Rates and Financial Fragility,” in New Challenges for Monetary Policy (Kansas City: Federal Reserve Bank of Kansas City), pp. 329–68.
- Jeanne, Olivier, 2005, “Why Do Emerging Economies Borrow in Foreign Currency?” in Other People’s Money, ed. by Barry Eichengreen and Ricardo Hausmann (Chicago: University of Chicago Press), pp. 190–217.
- Jeanne, Olivier, and Jeromin Zettelmeyer, 2005, “Original Sin, Balance Sheet Crises and the Roles of International Lending,” in Other People’s Money, ed. by Barry Eichengreen and Ricardo Hausmann (Chicago: University of Chicago Press), pp. 95–121.
- Claessens, Stijn, Daniela Klingebiel, and Sergio Schmukler, 2003, “Government Bonds in Domestic and Foreign Currency: The Role of Macroeconomic and Institutional Factors,” CEPR Discussion Paper No.3789 (London: Center for Economic Policy Research).

### Domestic debt markets and bond market development
- Christensen, Jakob, 2005, “Domestic Debt Markets in Sub-Saharan Africa,” Staff Papers, International Monetary Fund, Vol. 52(3), pp. 518–38.
- —— and Pipat Luengnaruemitchai, 2004, “Why Doesn’t Asia Have Bigger Bonds Markets?” NBER Working Paper 10576 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Burger, John D., and Frank Warnock, 2003, “Diversification, Original Sin, and International Bond Portfolios,” International Finance Discussion Papers No.755 (Washignton: Board of Governors of the Federal Reserve System).

### Databases, empirical investigations, and methodological contributions
- Jeanne, Olivier, and Anastasia Guscina, 2006, “Guide to the Jeanne-Guscina Dataset” (unpublished; Washington: International Monetary Fund).
- Kamil, Herman, 2006, “A New Database on the Currency Composition and Maturity Structure of Firms’ Balance Sheets in Latin America” (unpublished; Washington: International Monetary Fund).
- Mehl, Arnaud, and Julien Reynaud, 2005, “The Determinants of ‘Domestic’ Original Sin in Emerging Market Economies,” Working Paper 560 (Frankfurt: European Central Bank).
- Cowan, Kevin, Eduardo Levy-Yeyati, Ugo Panizza, and Federico Sturzenegger, 2006, “Public Debt in the Americas,” (forthcoming; Washington: Research Department, Inter-American Development Bank).
- Isard, Peter, 2005, Globalization and the International Financial System (Cambridge: Cambridge University Press).

*Source: _wp0698 - REFERENCES*

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