Why Do Emerging Economies Borrow in Foreign Currency?

Olivier Jeanne

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Fiscal Policies and Political Economy

Abstract

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.

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References

1952PORTFOLIO SELECTION*1984Financial Intermediation and Delegated Monitoring 1998The Financial Accelerator in a Quantitative Business Cycle Framework 1985The Determinants of Firms' Hedging Policies 1979Optimal contracts and competitive markets with costly state verification 1993Risk Management: Coordinating Corporate Investment and Financing Policies 1952Safety First and the Holding of Assets 1985Incentive-Compatible Debt Contracts: The One-Period Problem

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2017Regulating capital flows to emerging markets: An externality view 2003Evolution and Performance of Exchange Rate Regimes 2007Government Bonds in Domestic and Foreign Currency: the Role of Institutional and Macroeconomic Factors*2003The Mirage of Exchange Rate Regimes for Emerging Market Countries 2008Determinants of Foreign Currency Borrowing in the New Member States of the EU 2014Capital Inflows, Exchange Rate Flexibility and Credit Booms

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