Why Do Emerging Economies Borrow in Foreign Currency?

38 Pages Posted: 10 Oct 2003

See all articles by Olivier Jeanne

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

Date Written: August 2003

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.

Keywords: Foreign currency debt, liability dollarization, monetary credibility, financial crisis, devaluation

JEL Classification: F31, F36, G32

Suggested Citation

Jeanne, Olivier, Why Do Emerging Economies Borrow in Foreign Currency? (August 2003). Available at SSRN: https://ssrn.com/abstract=457722

Olivier Jeanne (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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