Debauchery and Original Sin: The Currency Composition of Sovereign Debt

• 成果类型: Article
• 署名作者: Engel, Charles; Park, JungJae
• 署名单位: University of Wisconsin System; University of Wisconsin Madison; Yonsei University
• 刊物名称: JOURNAL OF THE EUROPEAN ECONOMIC ASSOCIATION
• ISSN/ISSBN: 1542-4766
• DOI: 10.1093/jeea/jvac009
• 发表日期: 2022
• 页码: 1095-1144
• 关键词: monetary-policy; RISK; repudiation; DISCRETION; default; rules; MODEL

摘要

We present a model that accounts for the mystery of original sin and the surge in local-currency borrowing by emerging economies in the recent decade. We quantitatively investigate the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government's monetary and debt policy: strategic currency debasement and default on sovereign debt. Local-currency debt obligations act as a better consumption hedge against income shocks than foreign-currency debt because their real value can be affected by monetary policy. However, this provides a government with more temptation to deviate from disciplined monetary policy, thus restricting borrowing in local currency more than in foreign currency. Our model predicts that a country with a less credible monetary policy borrows mainly in foreign currency as a substitute for monetary credibility. An important extension demonstrates that in the presence of an expectational Phillips curve, local-currency debt improves the ability of monetary policymakers to commit.