Working Paper: NBER ID: w13076
Authors: Fernando A. Broner; Guido Lorenzoni; Sergio L. Schmukler
Abstract: We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies.
Keywords: emerging economies; debt maturity; risk premium; financial crises
JEL Codes: E43; F30; F34; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high risk premium on long-term debt (G32) | preference for short-term borrowing (G21) |
| issuing long-term debt (H74) | lower probability of rollover crisis (F65) |
| lower probability of rollover crisis (F65) | transfer risk to bondholders (G32) |
| transfer risk to bondholders (G32) | increase in risk premium (G19) |
| increase in risk premium (G19) | increase in borrowing costs (F65) |
| investor risk aversion during crises (G01) | increase in term premium on long-term bonds (E43) |
| maturity of bond issuance shifts towards shorter maturities (E43) | during financial turmoil (G01) |
| moral hazard (G52) | short-term borrowing behavior (G51) |
| supply-side factors (J20) | short-term borrowing behavior (G51) |