Why do emerging economies borrow short term?
By: Fernando A. Broner, Guido Lorenzoni, Sergio L. Schmukler.
Contributors: Lorenzoni, Guido.; Schmukler, Sergio L.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13076.; Working paper series (National Bureau of Economic Research) -- working paper no. 13076.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 41
Subjects: Debt -- Developing countries -- Econometric models
Description: 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: "May 2007"

Includes bibliographical references (p. 31-34).

Also available in PDF from the NBER world wide web site (www.nber.org).