We construct a new dataset of 14 emerging markets and show that sovereigns increasingly borrow from foreigners in local currency but the private sector continues to borrow in foreign currency. We show that a higher reliance on foreign currency corporate financing is associated with more sovereign default risk. We introduce local currency sovereign debt and private currency mismatch into a standard sovereign debt model to examine how the currency composition of corporate borrowing affects the sovereign's incentive to inflate or default. A calibration of the model generates the empirical patterns of currency and sovereign credit risk over the last decade.
Du, Wenxin, and Jesse Schreger. "Sovereign Risk, Currency Risk, and Corporate Balance Sheets." Columbia Business School, September 2017.
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