Title: Default, Inflation Expectations, and the Currency Denomination of Sovereign Bonds
Abstract: The share of debt denominated in domestic national currency issued by emerging economies has been rising sharply over time-progress away from the "original sin" of invoicing sovereign debt in foreign currencies. Yet this progress has been partial and subject to fluctuations. This paper develops a New Keynesian model with sovereign default where the government can manipulate expected inflation through debt issuance and default policies. High levels of national currency debt incentivize governments to reduce debt repayment by escalating (expected) inflation. Governments tilt the currency denomination of debt towards foreign currency to avoid distortions from escalating (expected) inflation, at the cost of giving up hedging consumption fluctuations of national currency debt. The model highlights default risk as a key factor driving a higher share of debt in foreign currency when expected inflation rises-a pattern observed in inflation-targeting emerging economies. Quantitatively, default risk explains up to 37 percentage points of the share of debt in foreign currency. Optimal debt management contains inflation, default frequency, and spreads.
맹승현 연사는 개발도상국의 국가 디폴트 위험과 이와 관련된 재정 및 화폐정책 간의 연관성에 대해 연구 교류를 진행하였습니다.
10월 4일 대우관 323호에서 경제학과 BK 초청 세미나가 진행되었습니다.
[발표 연사 및 주제]
Title: Default, Inflation Expectations, and the Currency Denomination of Sovereign Bonds
Abstract: The share of debt denominated in domestic national currency issued by emerging economies has been rising sharply over time-progress away from the "original sin" of invoicing sovereign debt in foreign currencies. Yet this progress has been partial and subject to fluctuations. This paper develops a New Keynesian model with sovereign default where the government can manipulate expected inflation through debt issuance and default policies. High levels of national currency debt incentivize governments to reduce debt repayment by escalating (expected) inflation. Governments tilt the currency denomination of debt towards foreign currency to avoid distortions from escalating (expected) inflation, at the cost of giving up hedging consumption fluctuations of national currency debt. The model highlights default risk as a key factor driving a higher share of debt in foreign currency when expected inflation rises-a pattern observed in inflation-targeting emerging economies. Quantitatively, default risk explains up to 37 percentage points of the share of debt in foreign currency. Optimal debt management contains inflation, default frequency, and spreads.
맹승현 연사는 개발도상국의 국가 디폴트 위험과 이와 관련된 재정 및 화폐정책 간의 연관성에 대해 연구 교류를 진행하였습니다.
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