Why Do Emerging Market Economies Borrow in Foreign Currency?

38 Pages Posted: 3 Feb 2006

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: September 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

JEL Classification: F31 F36 G32

Suggested Citation

Jeanne, Olivier, Why Do Emerging Market Economies Borrow in Foreign Currency? (September 2003). IMF Working Paper No. 03/177, Available at SSRN: https://ssrn.com/abstract=880240

Olivier Jeanne (Contact Author)

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

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Centre for Economic Policy Research (CEPR)

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