Excessive Dollar Debt : Financial Development and Underinsurance

By Caballero, Ricardo J

Book Id: WPLBN0004105964
Format Type: PDF eBook :
File Size: Pages: 46
Reproduction Date: 2002

Title:	Excessive Dollar Debt : Financial Development and Underinsurance
Author:	Caballero, Ricardo J
Volume:
Language:	English
Subject:	Heating \| Division 23 \| Hvac. Energy Conservation \| , Federal Aid to Community Development, Urban Renewal
Collections:	American Libraries Collection
Historic Publication Date:	2002
Publisher:	Cambridge, Ma : Massachusetts Institute of Technology, Dept. of Economics


Citation APA MLA Chicago Of Technology. Dept. Of Economic, M. I. (2002). Excessive Dollar Debt : Financial Development and Underinsurance. Retrieved from http://gutenberg.cc/

Description
Description: We propose that the limited financial 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 financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt 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 problems. Keywords: Currency mismatch, balance sheets, international liquidity, contingent credit lines, thin markets, limited participation. JEL Classification: F300, F310, F340 G150, G380