{ "title": "Why Do Emerging Economies Borrow in Foreign Currency?", "publication": "IMF Working Papers, September 1, 2003", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763", "overlayPath": "/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763/index.md", "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.", "sections": [ { "heading": "Summary", "content": "- Explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility.\n- Presents a model in which firms choose the currency composition of their debts so as to minimize their probability of default.\n- Decreasing monetary credibility can induce firms to dollarize their liabilities, even though this makes them vulnerable to a depreciation of the domestic currency.\n- The channel is different from the channel studied in the earlier literature on sovereign debt, and it applies to both private and public debt.\n- The paper presents some empirical evidence and discusses policy implications." }, { "heading": "Model and Mechanism", "content": "- Firms choose currency composition of debt to minimize probability of default.\n- Reduced monetary credibility increases the incentive for firms to denominate debt in foreign currency (dollarize liabilities).\n- Dollarization lowers default risk under certain monetary credibility scenarios but increases vulnerability to domestic currency depreciation.\n- The mechanism described applies to both private and public debt and is distinct from channels in earlier sovereign-debt literature." }, { "heading": "Empirical Evidence", "content": "- The paper presents some empirical evidence consistent with the model’s hypothesis (details of empirical tests are contained in the full paper)." }, { "heading": "Policy Implications", "content": "- Monetary credibility influences firms’ currency-denomination choices for liabilities.\n- Restoring or strengthening monetary credibility can reduce incentives for liability dollarization.\n- Implications apply to policy design concerning exchange-rate arrangements, monetary policy credibility, and debt composition for both private and public sectors." }, { "heading": "Publication and Metadata", "content": "- Author: Olivier D Jeanne\n- Date: September 1, 2003\n- Series: Working Paper No. 2003/177\n- Issue: 177\n- Volume: 2003\n- Pages: 38\n- DOI: https://doi.org/10.5089/9781451858891.001\n- Stock No: WPIEA1772003\n- ISBN: 9781451858891\n- ISSN: 1018-5941\n- Subjects: Conventional peg, Currencies, Domestic debt, External debt, Foreign currency debt, Foreign exchange, Labor, Money, Public debt, Self-employment\n- 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\n\nIMF Working Paper: \"Why Do Emerging Economies Borrow in Foreign Currency?\" by Olivier D Jeanne (Working Paper No. 2003/177, September 1, 2003).\n\n---\n\n Content in this bundle\n\n- Why Do Emerging Market Economies Borrow in Foreign Currency? - WP/03/177\n - Why Do Emerging Market Economies Borrow in Foreign Currency? - WP/03/177 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Why Do Emerging Market Economies Borrow in Foreign Currency? - WP/03/177 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/30/why-do-emerging-economies-borrow-in-foreign-currency-16763/bundle-manifest.json)", "Authors: Olivier D Jeanne", "Published: September 1, 2003", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781451858891.001", "Explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility.", "Presents 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.", "Firms choose currency composition of debt to minimize probability of default.", "Reduced monetary credibility increases the incentive for firms to denominate debt in foreign currency (dollarize liabilities).", "Dollarization lowers default risk under certain monetary credibility scenarios but increases vulnerability to domestic currency depreciation.", "The mechanism described applies to both private and public debt and is distinct from channels in earlier sovereign-debt literature.", "The paper presents some empirical evidence consistent with the model’s hypothesis (details of empirical tests are contained in the full paper).", "Monetary credibility influences firms’ currency-denomination choices for liabilities.", "Restoring or strengthening monetary credibility can reduce incentives for liability dollarization.", "Implications apply to policy design concerning exchange-rate arrangements, monetary policy credibility, and debt composition for both private and public sectors.", "Author: Olivier D Jeanne", "Date: September 1, 2003", "Series: Working Paper No. 2003/177", "Issue: 177", "Volume: 2003", "Pages: 38", "DOI: https://doi.org/10.5089/9781451858891.001", "Stock No: WPIEA1772003", "ISBN: 9781451858891", "ISSN: 1018-5941", "Subjects: 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", "**Why Do Emerging Market Economies Borrow in Foreign Currency? 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