Local currency (LC) debt provides consumption-smoothing benefits if it gets inflated away during recessions. However, we document that countries with more procyclical inflation and countercyclical LC bond returns, where consumption-smoothing benefits are lowest, issue the most LC debt. Monetary policy credibility explains this pattern through its effect on bond risk premia. In our model, low-credibility governments are more likely to inflate during recessions, generating excessively countercyclical inflation beyond the standard inflationary bias. In the model, and the data, low-credibility governments pay higher risk premia on LC debt, leading them to borrow in foreign currency.