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Why Do Emerging Economies Borrow Short Term?
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Abstract
We argue that emerging economies borrow short term due to the high risk premium charged
by bondholders on long-term debt. First, we present a model where the debt maturity structure
is the outcome of a risk sharing problem between the government and bondholders. By issuing
long-term debt, the government lowers the probability of a rollover crisis, transferring risk to
bondholders. In equilibrium, this risk is re‡ected in a higher risk premium and borrowing cost.
Therefore, the government faces a trade-o¤ between safer long-term debt and cheaper short-term
debt. Second, we construct a new database of sovereign bond prices and issuance. We show that
emerging economies pay a positive term premium (a higher risk premium on long-term bonds
than on short-term bonds). During crises, the term premium increases, with issuance shifting
towards shorter maturities. The evidence suggests that investor risk aversion is important to
understand the debt structure in emerging economiesemerging market debt; financial crises; investor risk aversion