We document that governments whose local currency debt provides them with greater hedging benefits actually issue relatively more foreign currency debt. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and varying degrees of inflation commitment. A government with imperfect commitment chooses an excessively counter-cyclical inflation policy function ex post, which leads risk-averse lenders to require a risk premium ex ante. This makes local currency debt too expensive from the government's perspective and thereby discourages the government from borrowing in its own currency.
Du, Wenxin, Carolin Pflueger, and Jesse Schreger. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy." Columbia Business School, October 2018.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.