WHY DO EMERGING ECONOMIES BORROW SHORT TERM?

Authors


  • The editor in charge of this paper was Fabrizio Zilibotti.

  • Acknowledgments: We are grateful to Francisco Ceballos, Tatiana Didier, Juan Carlos Gozzi, Marina Halac, and Lishan Shi for superb research assistance. For very valuable comments, we thank Mark Aguiar, Ricardo Caballero, Olivier Jeanne, Roberto Rigobon, Jaume Ventura, Jeromin Zettelmeyer, Fabrizio Zilibotti, three anonymous referees, and participants at presentations held at the AEA Meetings (Washington, DC), the Conference on Sovereign Debt at the Dallas Fed, CREI, the Darden International Finance Conference (Boston), George Washington University, the Inter-American Development Bank, the IMF Annual Research Conference, the LACEA Meetings, MIT, the NBER Summer Institute, the SED Meetings (Vancouver), and the XII Finance Forum (Barcelona). For financial support, Schmukler thanks the World Bank Research Support Budget and Latin American and Caribbean Research Studies Program and the IMF Research Department. Broner thanks the Spanish Ministry of Science and Innovation, the Generalitat de Catalunya, and the European Research Council (FP7/2007-2013, grant 263846).

  • E-mail: fbroner@crei.cat (Broner); glorenzo@mit.edu (Lorenzoni); sschmukler@worldbank.org (Schmukler)

Abstract

We argue that one reason why emerging economies borrow short term is that it is cheaper than borrowing long term. This is especially the case during crises, as during these episodes the relative cost of long-term borrowing increases. We construct a unique database of sovereign bond prices, returns, and issuances at different maturities for 11 emerging economies from 1990 to 2009 and present a set of new stylized facts. On average, these countries pay a higher risk premium on long-term than on short-term bonds. During crises, the difference between the two risk premia increases and issuance shifts towards shorter maturities. To illustrate our argument, we present a simple model in which the maturity structure is the outcome of a risk-sharing problem between an emerging economy subject to rollover crises and risk-averse international investors.

Ancillary