Discussion Paper Details

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Title: Why Do Emerging Economies Borrow in Foreign Currency?

Author(s): Olivier Jeanne

Publication Date: August 2003

Keyword(s): devaluation, financial crisis, foreign currency debt, liability dollarization and monetary credibility

Programme Area(s): International Macroeconomics

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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Bibliographic Reference

Jeanne, O. 2003. 'Why Do Emerging Economies Borrow in Foreign Currency?'. London, Centre for Economic Policy Research.