Monetary and Macroprudential Policies under Dollar-Denominated Foreign Debt

Wed, 01 Jan 2025 00:00:00 +0000

Research question and motivation: Emerging economies have rapidly accumulated foreign-currency (mostly dollar) debt — the dollar share of 14 emerging economies’ foreign debt rose from 75% in 2010 to 81% in 2018. Such debt is dangerous because sudden stops in capital inflows cause sharp currency depreciation that mechanically raises the domestic-currency value of the debt. The paper asks: when a country holds dollar-denominated foreign debt, does macroprudential policy mitigate depreciation and downturns during sudden stops, how should monetary policy be conducted, and how should the two policies cooperate? Existing sudden-stop models (with loan-to-value/debt-to-income collateral constraints and pecuniary externalities) do not model the channel by which depreciation inflates the value of dollar debt.

Hidehiko Matsumoto | Macro Paper Warehouse

Monetary and Macroprudential Policies under Dollar-Denominated Foreign Debt