Domestic versus External Borrowing and Fiscal Policy in Emerging Markets |
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| Authors: | Garima Vasishtha |
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| Institution: | 1. Bank of Canada, International Department, Ottawa, Canada;2. I am indebted to Kenneth Kletzer for his invaluable support and guidance. I would also like to thank Joshua Aizenman, Don Coletti, Michael Hutchison, Brent Haddad, Thorsten Janus, Lawrence Schembri, and Nirvikar Singh for many helpful suggestions. All remaining errors are my own. The views expressed in this paper are those of the author. No responsibility for them should be attributed to the Bank of Canada. |
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| Abstract: | This paper presents a model of an emerging market sovereign that can selectively default on its domestic or external creditors. The two classes of creditors have different ways of punishing the government in the event of default, which in turn creates a differential in the sovereign's incentives to default on its domestic versus foreign creditors. We explore the extent to which the possibility of differential treatment of creditors affects the composition of debt. We find that a country characterized by volatile output, sovereign risk, and costly tax collection will want to borrow in domestic as well as in international markets. |
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