Why Do Emerging Economies Borrow in Foreign Currency?
September 1, 2003
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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.
Subject: Conventional peg, Currencies, Domestic debt, External debt, Foreign currency debt, Foreign exchange, Labor, Money, Public debt, Self-employment
Keywords: Conventional peg, Currencies, currency composition, currency peg, debt contract, debt structure, dollar debt, Domestic debt, exchange rate, foreign currency, Foreign currency debt, Liability Dollarization, long-term debt, Monetary Credibility, monetary policy, results from a lack, Self-employment, short-term debt, Southeast Asia, WP
Pages:
38
Volume:
2003
DOI:
Issue:
177
Series:
Working Paper No. 2003/177
Stock No:
WPIEA1772003
ISBN:
9781451858891
ISSN:
1018-5941
