Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267307 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10074
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
For emerging economies, borrowing abroad is a double-edged sword: it can buffer against adverse economic shocks and smooth their domestic consumption; however, it can also amplify volatility in consumption, depending on the currency in which the debt is denominated and cyclicality in the borrower's exchange rate. We empirically investigate the nexus among external debt portfolios, exchange rate cyclicality, and volatility in consumption of low- and middle-income countries. Since 1980, many countries have concentrated their external debt portfolios' currency composition. By constructing debt-weighted effective exchange rates, we find that currency concentration magnifies exchange rate pro-cyclicality, making domestic consumption more volatile when national income fluctuates. Our results endorse diversifying the currency composition of external debt to mitigate the negative consequences of "original sin."
Subjects: 
external debt
currency portfolio
original sin
exchange rate cyclicality
volatility in consumption
JEL: 
F34
F31
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.