PUBLIC DEBT MATURITY AND CURRENCY CRISES

The theory underlying the effect of debt structure on the probability of a currency crisis and the slope of the yield curve was developed in Benigno and Missale (2004). In this paper, we provide the empirical evidence to support their model's predictions. In a dynamic panel data framework, we produce generalized method of moments estimates that give substantial support to the hypothesis that the role of short‐term debt depends on how a devaluation affects the reputation of the policymaker and the real value of public debt. In addition to the empirical analysis, we generalize the theoretical framework to allow for the presence of non‐deflatable debt and, for completeness, examine the case where the monetary authority can fully commit itself to an escape clause monetary rule.