Currency Composition of External Debt, Defaults and Exchange Rate Dynamics (Preliminary and Incomplete)
|Speaker:||Tamon Asonuma, Boston University|
|Date:||Friday 12 April 2013|
|Location:||Matrix Lecture Theatre, Building One|
Emerging countries experience exchange rate depreciations around the default events. This paper attempts to explore this observed evidence within a dynamic stochastic general equilibrium model in which bond issuance in local and foreign currencies are explicitly embedded and exchange rate and default risk are determined endogenously. Our quantitative analysis replicates link between exchange rate depreciation and default probability before and after defaults. In pre-default periods, a combination of both exchange rate depreciation originated by lower traded goods income and a large share of foreign currency denominated debt triggers default choice of emerging countries. In post default periods, exchange rate in turn, depreciates further due to output costs of defaulting and being financially auturky.