The Impact of currency mismatch on emerging markets sovereign spread

Abstract

This paper assesses the effect of currency mismatch on emerging market sovereign spread for the period 2004-2012. We have constructed a dataset from 15 emerging countries, composing currency mismatch as the ratio of loans in foreign currency-to-deposits in foreign currency and estimate the effect on sovereign spread measure by EMBI Global index. We find that currency mismatch, as interacting with solvency indicators, is positively associated with emerging markets sovereign spreads. These results suggest that monetary policy makers in emerging economies should consider the prevention of currency mismatches in the domestic financial system in order to reduce sovereign spread.