An Alternative Framework for Foreign Exchange Risk Management of Sovereign Debt

This paper proposes a measure of synchronization in the movements of relevant domestic and foreign fundamentals for choosing suitable currency for denomination of foreign debt. The selection of explanatory variables for exchange rate volatility is motivated using a New Keynesian Policy model. The model predicts that not only traditional optimal currency area variables, but also variables considered by the literature on currency preferences, such as money velocity, should be relevant for explaining exchange rate volatility. The findings show that measures of inflation synchronization, money velocity synchronization, and interest rate synchronization can be useful indicators for decisions on the currency denomination of foreign debt.

Bibliographic Details

Main Author:	Melecky, Martin
Language:	English
Published:	World Bank, Washington, DC 2008-01
Subjects:	BALANCE SHEET, BALANCE SHEETS, BANK POLICY, BENCHMARK, BILATERAL EXCHANGE RATE, BORROWING COST, BORROWING STRATEGIES, BUSINESS CYCLES, CAPITAL CONTROLS, CENTRAL BANK, CLOSED ECONOMY, CONTRIBUTION, CREDIBILITY, CURRENCY, CURRENCY COMPOSITION, CURRENCY CRISES, CURRENCY DENOMINATION, CURRENCY EXPOSURES, CURRENCY MISMATCHES, CURRENCY SUBSTITUTION, CURRENCY VALUE, CURRENCY VALUES, DATA AVAILABILITY, DEBT DENOMINATION, DEBT MANAGEMENT, DEBT-SERVICE, DEMAND FOR MONEY, DEPENDENT VARIABLE, DEPRECIATION, DERIVATIVE, DERIVATIVES, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPMENT ECONOMICS, DEVELOPMENT OF BOND MARKETS, DOMESTIC BOND, DOMESTIC BOND MARKETS, DOMESTIC CURRENCY, DOMESTIC ECONOMY, DOMESTIC INTEREST RATE, DOMESTIC MARKETS, DOMESTIC PRICE, DOMESTIC PRICE LEVEL, ECONOMETRIC ANALYSIS, ECONOMIC ACTIVITY, EMERGING ECONOMIES, EMERGING MARKET, EMERGING MARKET ECONOMIES, EQUILIBRIUM, ERROR TERM, EXCHANGE MARKET, EXCHANGE RATE, EXCHANGE RATE MANAGEMENT, EXCHANGE RATE MOVEMENTS, EXCHANGE RATE REGIMES, EXCHANGE RATE RISK, EXCHANGE RATE VARIABILITY, EXCHANGE RATE VOLATILITY, EXCHANGE RATES, EXPENDITURE, EXPLANATORY VARIABLES, EXPOSURE, EXPOSURES, EXTERNAL BALANCES, EXTERNAL SHOCKS, FINANCIAL INTEGRATION, FOREIGN CURRENCIES, FOREIGN CURRENCY, FOREIGN CURRENCY DEBT, FOREIGN DEBT, FOREIGN EXCHANGE, FOREIGN EXCHANGE DEBT, FOREIGN EXCHANGE MARKETS, FOREIGN EXCHANGE RESERVES, FOREIGN EXCHANGE RISK, FOREIGN INTEREST, FOREIGN INTEREST RATE, FUNCTIONAL FORMS, FUNDAMENTAL DETERMINANTS, GDP, GOVERNMENT BORROWING, GOVERNMENT BUDGET, GOVERNMENT DEBT, GOVERNMENT REVENUES, GROWTH RATES, HARD CURRENCY, HEDGES, HIGH-INCOME COUNTRIES, INCOME, INDIVIDUAL CURRENCIES, INFLATION, INSTRUMENT, INTEREST RATE, INTEREST RATE RISK, INTEREST RATE VOLATILITY, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL CURRENCY, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL STATISTIC, INTERNATIONAL MONEY, LEVEL OF RISK, LEVERAGE, LIABILITY, LIABILITY MANAGEMENT, LOCAL CURRENCY, LONG-TERM COSTS, LOW-INCOME, LOW-INCOME COUNTRIES, M2, MAJOR CURRENCIES, MARGINAL UTILITY, MARKET INTEREST, MARKET INTEREST RATE, MARKET INTEREST RATES, MARKET PRESSURE, MIDDLE-INCOME COUNTRIES, MONETARY AGGREGATE, MONETARY AUTHORITY, MONETARY POLICY, MONEY DEMAND, MONEY DEMAND INCREASES, MONEY MARKET, MONEY SUPPLY, NOMINAL EXCHANGE RATES, NOMINAL INTEREST RATE, OIL REVENUES, OPTIMAL ALLOCATION, OPTIMIZATION, OPTIMUM CURRENCY AREA, OPTIMUM CURRENCY AREAS, OUTPUT, OUTPUT GAP, PANEL DATA ESTIMATION, PEG, PHILLIPS CURVE, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIOS, PRESENT VALUE, PUBLIC DEBT, PUBLIC DEBT MANAGEMENT, PUBLIC DEBT MANAGERS, RANDOM VARIABLES, REAL INTEREST, REAL INTEREST RATE, REFERENCE CURRENCIES, REGRESSION ANALYSIS, RELATIVE PRICE, RESERVES, RETURN, RISK MANAGEMENT, SHORT-TERM INTEREST RATES, SOVEREIGN DEBT, STANDARD DEVIATION, STANDARD DEVIATIONS, STEADY STATE, STOCKS, STRUCTURAL SHOCKS, SUPPLY SIDE, TAX, TERM STRUCTURE OF INTEREST RATES, TRANSACTIONS COSTS, TRANSMISSION MECHANISMS, UNCERTAINTY, USE OF DERIVATIVES, WEIGHTS, ZERO WEIGHTS,
Online Access:	http://documents.worldbank.org/curated/en/2008/01/8912546/alternative-framework-foreign-exchange-risk-management-sovereign-debt https://hdl.handle.net/10986/6452
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