Choosing the Currency Structure for Sovereign Debt: A Review of Current ApproachesThis paper acknowledges the fact that some countries have to borrow in foreign currencies due to the various constraints they face. Starting from this point, the author reviews approaches for trying to determine the currency structure for sovereign debt, and discusses some issues inherent in these approaches. The analysis mainly focuses on the correlations of domestic fundamentals with the actual versus equilibrium exchange rate in light of the long-term perspective of a debt manager and changing exchange rate regimes. In addition, the author makes some observations on the characterization of exchange rate volatilities in the existing approaches. |
Common terms and phrases
AB+1 At+1 balance sheet bond markets borrow in foreign BRL/USD candidate currencies Claessens cost covariances currency benchmark currency composition currency denomination currency mismatches Danmarks Nationalbank debt denominated debt managers debt-to-GDP ratio denomination of foreign discuss distress barrier domestic and foreign domestic currency domestic economy domestic fundamentals economic fundamentals economic variables emerging market economies equilibrium exchange rate estimation et+1 exchange rate regimes exchange rate variance exchange rate volatility foreign currency debt foreign debt foreign economy framework FX risk Giavazzi and Missale Government Debt government's Hausmann inflation-indexed bonds interest rate issue it+1 Licandro and Masoller macroeconomic monetary policy national central banks nomic nominal debt Normal distributions numerical approaches optimal currency structure processes Public debt relative Research Working Paper Review risk analysis risk management risk premia scenario analysis simulation sovereign debt portfolios stochastic stochastic volatilities stress testing structural shocks structure of foreign vector World Bank