THE CURRENCY DENOMINATION OF SOVEREIGNDEBT

This paper considers the currency composition of sovereign debt in the context of risksharingthrough excusable defaults. It is shown that monetary credibility is not asufficient condition for borrowing in domestic currency. With real exchange rate risk,debt denominated in a borrowing country’s currency can be too state-contingent tosupport international lending on purely reputational considerations, even when debtdenominated in the lending country’s currency is viable...