Why do emerging economies borrow short term?, Vol. 1 of 1

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Why do emerging economies borrow short term?

Author:	Broner, Fernando A.; Lorenzoni, Guido; Schmukler, Sergio L.;	Collection Title:	Policy, Research working paper ; no. WPS 3389
Country:	World;	Date Stored:	2004/09/10
Document Date:	2004/09/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	The World Region
Report Number:	WPS3389	SubTopics:	Environmental Economics & Policies; International Terrorism & Counterterrorism; Economic Theory & Research; Payment Systems & Infrastructure; Banks & Banking Reform; Financial Intermediation; Public Sector Economics
Volume No:	1 of 1	Related Dataset:	Why do emerging markets borrow short term? Data files;

Summary: The authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. They first present a model where the debt maturity structure is the outcome of a risk-sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a tradeoff between safer long-term borrowing and cheaper short-term debt. Second, the authors construct a new database of sovereign bond prices and issuance. They show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting toward shorter maturities. This suggests that changes in bondholders' risk aversion are important to understand emerging market crises.


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File Type		Description	File Size (mb)

	PDF 64 pages	Official version*	0.70
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File Type		Description	File Size (mb)

	PDF 64 pages	WPS3389	0.57

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