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Wenxin Du, Jesse Schreger, Sovereign Risk, Currency Risk, and Corporate Balance Sheets, The Review of Financial Studies, Volume 35, Issue 10, October 2022, Pages 4587–4629, https://doi.org/10.1093/rfs/hhac001
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Abstract
We provide a comprehensive account of the evolution of the currency composition of sovereign and corporate external borrowing by emerging markets from 2003 to 2017. We show that a higher reliance on foreign currency debt by the corporate sector is associated with higher sovereign default risk. We introduce local currency sovereign debt and private sector currency mismatch into a standard sovereign debt model to examine how the currency composition of corporate borrowing affects the sovereign’s incentive to inflate or default. A calibration of the model generates the empirical patterns of sovereign credit risk.