Foreign currency debt and the global financial architecture

This paper discusses some problems posed by foreign currency debt for emerging economics in the context of the ongoing debate on the reform of the global financial architecture. We present a model in which the currency composition of corporate debt is endogenous, and discuss the optimality of measures aimed at coping with the risks posed by foreign currency debt. While removing these risks is not necessarily efficient in the presence of moral hazard, some forms of public intervention, such as a tax on foreign currency debt or international bailouts, may be optimal. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: F32; F33; F34: F36.