Why Do Emerging Economies Borrow Short Term? / Fernando A. Broner, Guido Lorenzoni, Sergio L. Schmukler.

Format:

Book

Author/Creator:

Broner, Fernando A.

Contributor:

National Bureau of Economic Research.

Lorenzoni, Guido.

Schmukler, Sergio L.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13076.

NBER working paper series no. w13076

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we 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 rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We 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 towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies.

Notes:

Print version record

May 2007.