Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy

46 Pages Posted: 7 Sep 2016

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Carolin E. Pflueger

University of Chicago - Harris Public Policy; National Bureau of Economic Research (NBER)

Jesse Schreger

Harvard University - Business School (HBS)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2016

Abstract

We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively counter-cyclical inflation ex post, which leads risk-averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.

Suggested Citation

Du, Wenxin and Pflueger, Carolin E. and Schreger, Jesse, Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy (September 2016). NBER Working Paper No. w22592. Available at SSRN: https://ssrn.com/abstract=2835850

Wenxin Du (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Carolin E. Pflueger

University of Chicago - Harris Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jesse Schreger

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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