Page content
The Role of Foreign Currency Debt in Public Debt Management
The paper examines the theoretical determinants of the choice between
domestic and foreign currency debt and presents an empirical analysis of the behavior of the share of public debt denominated in foreign currency in a group of member countries of the Organization for Economic Cooperation and Development, including Belgium, Denmark, Ireland, Italy, New Zealand, and Sweden. The theoretical analysis focuses on time consistency issues, the possibility of confidence crisis, the role of incomplete information, and the hedging role of public debt management. Practical considerations relate to, inter alia, portfolio management and the balance of payments situation. The empirical analysis examines the covariance between real interest payments on domestic and foreign currency debt on the one hand, and productivity and public spending shocks on the other hand. It also reports correlations of the share of foreign currency debt in total debt with the interest differential on domestic versus foreign debt instruments.
domestic and foreign currency debt and presents an empirical analysis of the behavior of the share of public debt denominated in foreign currency in a group of member countries of the Organization for Economic Cooperation and Development, including Belgium, Denmark, Ireland, Italy, New Zealand, and Sweden. The theoretical analysis focuses on time consistency issues, the possibility of confidence crisis, the role of incomplete information, and the hedging role of public debt management. Practical considerations relate to, inter alia, portfolio management and the balance of payments situation. The empirical analysis examines the covariance between real interest payments on domestic and foreign currency debt on the one hand, and productivity and public spending shocks on the other hand. It also reports correlations of the share of foreign currency debt in total debt with the interest differential on domestic versus foreign debt instruments.