Excessive dollar debt
Subtitle: financial development and underinsurance
By: Ricardo J. Caballero [and] Arvind Krishnamurthy
Contributors: Krishnamurthy, Arvind; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 02-15; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 02-15.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2002
Place of publication: Cambridge, MA
Language: eng
Number of pages: 29
Description: We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problems. Keywords: Currency mismatch, balance sheets, international liquidity, contingent credit lines, thin markets, limited participation. JEL Classification: F300, F310, F340 G150, G380.
Notes: "March 2002."; "March 1, 2002"--Abstract.

Includes bibliographical references (p. 28-29).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.