Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy
Corresponding Author
CAROLIN E. PFLUEGER
Correspondence: Carolin E. Pflueger, Harris School of Public Policy, University of Chicago, 1307 E 60th Street, Chicago, IL 60637; e-mail: cpflueger@uchicago.edu
Search for more papers by this authorJESSE SCHREGER
Wenxin Du and Carolin E. Pflueger are with the University of Chicago and NBER. Jesse Schreger is with Columbia Business School and NBER. We are grateful to Mark Aguiar; Daniel Andrei; Adrien Auclert (discussant); John Campbell; Lorenzo Garlappi; Joshua Gottlieb; Juan Carlos Hatchondo (discussant); Tarek Hassan; Oleg Itskhoki; Thomas Mertens; Vincenzo Quadrini (discussant); Julio Rotemberg; Rosen Valchev (discussant); Adrien Verdelhan; Jenny Tang; Pierre Yared; and seminar participants at AEA 2016, UCLA Anderson, Columbia University, Stanford GSB, MIT Sloan, the 8th Macro-Finance Society Meeting, NBER Summer Institute, UC Santa Barbara, the San Francisco Federal Reserve, the Federal Reserve Bank of Chicago, the Bank for International Settlements, and the University of British Columbia for helpful comments. Jiri Knesl, Sandra Ramirez, George Vojta, and Nanyu Chen provided excellent research assistance. Pflueger thanks MIT Sloan and Stanford GSB for their hospitality and UBC for research funding while working on this research. Schreger thanks the Princeton Economics Department for their hospitality during the research process and the Harvard Business School Division of Research for financial support. We have read The Journal of Finance disclosure policy and have nothing to disclose.
Search for more papers by this authorCorresponding Author
CAROLIN E. PFLUEGER
Correspondence: Carolin E. Pflueger, Harris School of Public Policy, University of Chicago, 1307 E 60th Street, Chicago, IL 60637; e-mail: cpflueger@uchicago.edu
Search for more papers by this authorJESSE SCHREGER
Wenxin Du and Carolin E. Pflueger are with the University of Chicago and NBER. Jesse Schreger is with Columbia Business School and NBER. We are grateful to Mark Aguiar; Daniel Andrei; Adrien Auclert (discussant); John Campbell; Lorenzo Garlappi; Joshua Gottlieb; Juan Carlos Hatchondo (discussant); Tarek Hassan; Oleg Itskhoki; Thomas Mertens; Vincenzo Quadrini (discussant); Julio Rotemberg; Rosen Valchev (discussant); Adrien Verdelhan; Jenny Tang; Pierre Yared; and seminar participants at AEA 2016, UCLA Anderson, Columbia University, Stanford GSB, MIT Sloan, the 8th Macro-Finance Society Meeting, NBER Summer Institute, UC Santa Barbara, the San Francisco Federal Reserve, the Federal Reserve Bank of Chicago, the Bank for International Settlements, and the University of British Columbia for helpful comments. Jiri Knesl, Sandra Ramirez, George Vojta, and Nanyu Chen provided excellent research assistance. Pflueger thanks MIT Sloan and Stanford GSB for their hospitality and UBC for research funding while working on this research. Schreger thanks the Princeton Economics Department for their hospitality during the research process and the Harvard Business School Division of Research for financial support. We have read The Journal of Finance disclosure policy and have nothing to disclose.
Search for more papers by this authorABSTRACT
We document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency. We introduce two features into a government's debt portfolio choice problem to explain this finding: risk-averse lenders and lack of monetary policy commitment. A government without commitment chooses excessively countercyclical inflation 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.
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