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Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy / Wenxin Du, Carolin E. Pflueger, Jesse Schreger.
- Format:
- Book
- Author/Creator:
- Du, Wenxin.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w22592.
- NBER working paper series no. w22592
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2016.
- Summary:
- We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively counter-cyclical inflation ex post, which leads risk-averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.
- Notes:
- Print version record
- September 2016.
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