NBER WORKING PAPER SERIES
SOVEREIGN DEBT PORTFOLIOS, BOND RISKS, AND THE CREDIBILITY
OFMONETARY POLICY
Wenxin DuCarolin E. Pflueger
Jesse Schreger
Working Paper 22592http://www.nber.org/papers/w22592
NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts
Avenue
Cambridge, MA 02138September 2016
We are grateful to Mark Aguiar, Daniel Andrei, Adrien Auclert
(discussant), John Campbell, LorenzoGarlappi, Joshua Gottlieb, Juan
Carlos Hatchondo (discussant), Tarek Hassan, Oleg Itskhoki,
ThomasMertens, Vincenzo Quadrini (discussant), Julio Rotemberg,
Rosen Valchev (discussant), Adrien Verdelhan,Jenny Tang, Pierre
Yared, and seminar participants at AEA 2016, UCLA Anderson,
Columbia University,Stanford GSB, MIT Sloan, the 8th Macro-Society
Meeting, NBER Summer Institute, UC Santa Barbara,the San Francisco
Federal Reserve, the Federal Reserve Bank of Chicago, the Bank for
InternationalSettlements, and the University of British Columbia
for helpful comments. Jiri Knesl, Sandra Ramirez,George Vojta, and
Nanyu Chen provided excellent research assistance. Pflueger thanks
MIT Sloanand Stanford GSB for their hospitality and UBC for
research funding while working on this research.Schreger thanks the
Princeton Economics Department for their hospitality during the
research processand the Harvard Business School Division of
Research for financial support. The views expressedherein are those
of the authors and do not necessarily reflect the views of the
National Bureau of EconomicResearch.
At least one co-author has disclosed a financial relationship of
potential relevance for this research.Further information is
available online at http://www.nber.org/papers/w22592.ack
NBER working papers are circulated for discussion and comment
purposes. They have not been peer-reviewed or been subject to the
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publications.
© 2016 by Wenxin Du, Carolin E. Pflueger, and Jesse Schreger.
All rights reserved. Short sectionsof text, not to exceed two
paragraphs, may be quoted without explicit permission provided that
fullcredit, including © notice, is given to the source.
Sovereign Debt Portfolios, Bond Risks, and the Credibility of
Monetary Policy Wenxin Du, Carolin E. Pflueger, and Jesse
SchregerNBER Working Paper No. 22592September 2016, Revised August
2019JEL No. E4,F3,G12,G15
ABSTRACT
We document that governments whose local currency debt provides
them with greater hedging benefitsactually borrow more in foreign
currency. We introduce two features into a government's debt
portfoliochoice problem to explain this finding: risk-averse
lenders and lack of monetary policy commitment.A government without
commitment chooses excessively counter-cyclical inflation ex post,
whichleads risk-averse lenders to require a risk premium ex ante.
This makes local currency debt too expensivefrom the government's
perspective and thereby discourages the government from borrowing
in itsown currency.
Wenxin DuBooth School of BusinessUniversity of Chicago5807 S.
Woodlawn AvenueChicago, IL 60637and
[email protected]
Carolin E. PfluegerUniversity of ChicagoHarris School of Public
Policy1307 E 60th StChicago, IL 60637and
[email protected]
Jesse SchregerColumbia Business School3022 BroadwayUris Hall
821New York, NY 10027and [email protected]
A online appendix is available at
http://www.nber.org/data-appendix/w22592
