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• Article | IMF Economic Review | June 2019

  Debt Redemption and Reserve Accumulation

  Laura Alfaro and Fabio Kanczuk

  In the past decade, foreign participation in local-currency bond markets in emerging countries increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can accumulate reserves and borrow internationally using their own currency. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and render consumption smoother. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.

  Keywords: Sovereign debt; local-currency bonds; foreign reserves; Sovereign Finance; Borrowing and Debt; Bonds; Financial Markets; Developing Countries and Economies;

  Citation:

  Alfaro, Laura, and Fabio Kanczuk. "Debt Redemption and Reserve Accumulation." IMF Economic Review 67, no. 2 (June 2019): 261–287. (Also NBER Working Paper No. 19098.)  View Details

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• Article | Journal of International Economics | May 2019

  Corporate Debt, Firm Size and Financial Fragility in Emerging Markets

  Laura Alfaro, Gonzalo Asis, Anusha Chari and Ugo Panizza

  The post-Global Financial Crisis period shows a surge in corporate leverage in emerging markets and a number of countries with deteriorated corporate financial fragility indicators (Altman’s Z-score). Firm size plays a critical role in the relationship between leverage, firm fragility, and exchange rate movements in emerging markets. While the relationship between firm leverage and distress scores varies over time, the relationship between firm size and corporate vulnerability is relatively time invariant. All else being equal, large firms in emerging markets are more financially vulnerable and also systemically important. Consistent with the granular origins of aggregate fluctuations in Gabaix (2011), idiosyncratic shocks to the sales growth of large firms are positively and significantly correlated with GDP growth in our emerging markets sample. Relatedly, the negative impact of exchange rate shocks has a more acute impact on the sales growth of the more highly levered large firms.

  Keywords: corporate debt; firm size; financial fragility; emerging market; Organizations; Borrowing and Debt; Financial Condition; Emerging Markets; System Shocks;

  Citation:

  Alfaro, Laura, Gonzalo Asis, Anusha Chari, and Ugo Panizza. "Corporate Debt, Firm Size and Financial Fragility in Emerging Markets." Journal of International Economics 118 (May 2019): 1–19. (Also NBER Working Paper 25459.)  View Details

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• Supplement | HBS Case Collection | January 2019 (Revised April 2019)

  Brexit: A Withdrawal Agreement?

  Laura Alfaro and Sarah Jeong

  Supplements the (A) case.

  Keywords: Brexit; United Kingdom;

  Citation:

  Alfaro, Laura, and Sarah Jeong. "Brexit: A Withdrawal Agreement?" Harvard Business School Supplement 319-086, January 2019. (Revised April 2019.)  View Details

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