Does Procyclical Fiscal Policy Reinforce Incentives to Dollarize Sovereign Debt?

Author/Editor:

Anna Ilyina ; Anastasia Guscina ; Herman Kamil

Publication Date:

July 1, 2010

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 link between the cyclical patterns of macroeconomic and policy variables and the currency composition of domestic sovereign debt in emerging market countries. The empirical analysis is anchored in an equilibrium model, in which the dollarization of sovereign debt arises as a result of the optimal portfolio choices by risk-averse investors, and of a sovereign debt manager who takes fiscal policy as given. The model predicts that in countries where the exchange rate is countercyclical (i.e., the exchange rate depreciates during recessions), a more procyclical fiscal policy (i.e., expansionary in good times and contractionary in bad times) would lead, on average, to a more dollarized domestic sovereign debt. The empirical analysis using the Jeanne-Guscina EM Debt database (2006) on the currency structure of the central government debt in 22 emerging market countries over 1980 - 2005, supports these predictions.

Series:

Working Paper No. 10/168

Subject:

English

Publication Date:

July 1, 2010

ISBN/ISSN:

9781455201792/1018-5941

Stock No:

WPIEA2010168

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

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