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Why do emerging economies borrow short term?
Broner, Fernando; Lorenzoni, Guido; Schmukler, Sergio L.
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We argue that one reason why emerging economies borrow short term is that it is cheaperthan borrowing long term. This is especially the case during crises, as in these episodes therelative cost of long-term borrowing increases. We construct a unique database of sovereignbond prices, returns, and issuances at di¤erent maturities for 11 emerging economies from 1990to 2009 and present a set of new stylized facts. On average, these countries pay a higher riskpremium on long-term than on short-term bonds. During crises, the di¤erence between the tworisk premia increases and issuance shifts towards shorter maturities. To illustrate our argument,we present a simple model in which the maturity structure is the outcome of a risk sharingproblem between an emerging economy subject to rollover crises and risk averse internationalinvestors.
Macroeconomics and International Economics
emerging markets; debt crises; investor risk aversion; maturity structure; risk premium; term premium
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