Excessive Dollar Debt: Financial Development and Underinsurance  

Oleh:

Caballero, Ricardo J. ; Krishnamurthy, Arvind

Jenis: Article from Journal - ilmiah internasional
Dalam koleksi: The Journal of Finance (EBSCO) vol. 58 no. 2 (Apr. 2003), page 867-893.
Fulltext: p 867.pdf (236.06KB)

Isi artikel

We propose that the limited ¢nancial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets.We show that when ¢nancialc onstraints a¡ect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when externald ebt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets.The retarded entry reinforces the underinsurance problem.

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