Is foreign debt portfolio management efficient in emerging economies?

This paper develops a simple model of foreign debt portfolio management. Th e model suggests that, under mild conditions, the currency composition of a country's foreign debt portfolio is responsive to exchange rate movements. Empirical evidence is provided for a panel of 14 emerging economies in the period 1970-1998. Attention is focused on the stocks of foreign liabilitie s denominated in US dollars, Deutschemarks (DM), Japanese yen, and Swiss fr ancs. The results of the empirical analysis show that foreign debt portfoli o management has been sub-optimal in the countries under examination. In th ese countries, the currency composition of foreign debt has not reflected a substitution effect away from the currencies that have appreciated over ti me vis-a-vis the US dollar. (C) 2001 Elsevier Science B.V. All rights reser ved.