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Why do emerging economies borrow short term?, Volume 1
 
Author:Broner, Fernando A.; Lorenzoni, Guido; Schmukler, Sergio L.; Country:World;
Date Stored:2004/09/10Document Date:2004/09/01
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; International Terrorism & Counterterrorism; Economic Theory & Research; Payment Systems & Infrastructure; Banks & Banking Reform; Financial Intermediation; Public Sector Economics
Language:EnglishRegion:The World Region
Report Number:WPS3389Collection Title:Policy, Research working paper ; no. WPS 3389
Volume No:1Related 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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