Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Jahjah, Samir; Bin, W.; Yue, Vivian Z.

doi:10.1111/jmcb.12052

Cited by 13 publications

(6 citation statements)

References 52 publications

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“…The second column in Table 4 and 5 summarizes moments of data. 26 Output data are As is obvious in Table 5, the model matches business cycle statistics in data in both pre-default and post-default periods. Our model replicates volatile consumption and trade balance/GDP volatility, both of which are prominent features of emerging economy business cycle models as in Aguilar and 2 6 See also Arellano (2008) and Yue (2010) for similar treatment of simulation.…”

Section: Simulation -Argentinamentioning

confidence: 92%

“…In a standard model with a risk-neutral creditor, bond spreads do not include any spread premia since bond prices are simply determined by default probability. On the contrary, in the current model with the riskaverse creditor, bond prices are determined by interaction between stochastic discount factors and expected payo¤, as shown in equation (25) and (26). Risk premia, due to risk aversion of the creditor, are included in bond spreads and increase spreads close to the data.…”

Section: Comparison With the Model Of A Risk-neutral Creditormentioning

confidence: 99%

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Sovereign Defaults, External Debt and Real Exchange Rate Dynamics

Asonuma

2014

SSRN Journal

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Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis, using the case of Argentina's default in 2001, replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign's large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.. JEL Classi…cation Codes: E43; F32; F34; G12

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Section: Simulation -Argentinamentioning

confidence: 92%

Section: Comparison With the Model Of A Risk-neutral Creditormentioning

confidence: 99%

Sovereign Defaults, External Debt and Real Exchange Rate Dynamics

Asonuma

2014

SSRN Journal

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“…Cheaper exchange rates serve as a subsidy to exporters and a duty to importers [27] and countries with a strict or less flexible exchange rate regime are less likely to sell bonds [29]. Lower inflation often increases currency values but the issue is complicated by the fact that central banks exert influence over both inflation and exchange rates through monetary policy.…”

Section: Literature Reviewmentioning

confidence: 99%

The Case for a Single Currency

Barbara¹,

Sandra²

2017

JAEF

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Abstract. Amidst the continued economic woes in the EU, lagging growth in China, the relative strengths and weaknesses of the dollar and other major currencies, and various and sundry articles about banker fraud, derivative-induced collapses, and general economic malaise, there lies an undercurrent of debate about a potential common monetary destiny: a single global currency. This paper evaluates eight currency candidates across the three roles of money and creates a typology of 70 nations using aggregate freedom scores from Freedom House and data from Bank for International Settlements (BIS) and the International Monetary Fund (IMF) to estimate banking system soundness. While some monetary units appear better suited for the monopoly role, none satisfies political criteria. Thirty-five nations scored well on total freedom and banking system stability and may serve as initial adopters if a currency candidate survives the political environment. Implementation concerns remain.Keywords: Global currency; currency; monetary reform; world currency The International Monetary System (IMS)The international monetary system is composed of exchange rate arrangements, capital flows and institutions, rules, and conventions governing the system's operations. Domestic policy generally falls into conformance [1]. Many argue that the international monetary system (IMS) is in desperate need of reform and that something must be done very soon to avoid catastrophe [1,2,3,4,5]. Alessandrini and Fratianni argue that the global instability derives from a deteriorating US dollar [6] and Subacchi called our system of volatile fiscal normalcy, "stable disequilibrium" [4, 668] presumably because it suffers from monstrous complexity, overextensions, burdensome debt and deficits, development here but poverty there, and central banks that have run out of ammunition to salve the world's economic wounds. Exchange rate and balance of payment imbalances, deflation in commodity demand, sudden currency devaluations, latent and patent wars, civil and religious conflicts, terrorism and fiscal imbalance, structural unemployment, and anti-austerity rallies [7] have prompted many to argue the time is right to move toward a single currency. But why would a single unit solve these problems? Exchange rate and balance of payments problems serve as a primary impetus for a single currency while others feel, for reasons of equity and cooperation, it is time to move away from a one currency reserve and create a new unit based on a basket of several existing, strong currencies. MethodologyThe shift to a single currency would represent a policy change of massive global proportions. Every nation, its businesses, every central bank, world bodies, retailers, households, and debt and pension fund holders would undergo huge recalculations in their budgets or portfolios. In the world of geopolitics, nothing is certain and, in modern times, since the modern world has never seen a global currency, there is no direct data by which to measure the success of one currency op...

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“…4 4 Focusing on developing countries, Jahjah, Wei and Yue (2013) showed that exchange rate policy affects the issuance and pricing of sovereign bonds, while Correa et al . (2014) examined the relations among support to banks, stock returns and sovereign credit ratings. …”

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confidence: 99%

Convergence in Sovereign Debt Defaults: Quantifying the Roles of Institutions

Bhattacharya

Inekwe

2021

Oxf Bull Econ Stat

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In this study, using an ex ante measure, we examine the convergence patterns in sovereign defaults among 101 developing countries for the period from 1990 to 2015. We employ the club convergence algorithm to determine convergence paths across countries and examine the role of institutions in shaping the observed convergence patterns. The merging of clubs reveals three distinct convergent sub‐clubs. Countries in each of these sub‐clubs tend to exhibit a similar pattern of long‐run convergence in cases of sovereign debt default. Countries with better institutions are less likely to belong to a club with greater risks of sovereign defaults by 7% points. Unlike trade openness, levels of external debt, inflation and current account balance increase the probability of default in these economies.

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Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Cited by 13 publications

References 52 publications

Sovereign Defaults, External Debt and Real Exchange Rate Dynamics

Sovereign Defaults, External Debt and Real Exchange Rate Dynamics

The Case for a Single Currency

Convergence in Sovereign Debt Defaults: Quantifying the Roles of Institutions

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