Impact of Macroeconomic, Political, and Institutional Factorson the Structure of Government Debt in Emerging Market Countries

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.Debt crises that have shaken Latin America, Asia, and Russia have brought an increasing attention to the structure of debt in emerging market countries. Using the newly released Jeanne-Guscina EM Government Debt Database 2006 this paper empirically explores the role of macroeconomic, political, and institutional factors in determining the structure of government debt. Results show that unstable macroeconomic environment, poor quality institutions, and uncertain political climate hinder the development of domestic debt market. Moreover, such instability shifts the debt structure away from long-term local currency fixed rate debt towards short-term debt or to debt indexed to foreign currency, short-term interest rates or inflation. Original sin seems to be on the way out, as more and more countries are issuing local currency debt at longer maturities-which can be explained by successful macroeconomic stabilization policies and lessons learned from the debt crises. JEL Classification Numbers: F34, F36, H63.

Government Debt and its Macroeconomic Determinants An Empirical Investigation

“…Countries with high and very high levels of inflation are less able to borrow on easy terms. Guscina (2008) shows that low and stable inflation is associated with higher domestic debt share in total central government debt. On the other hand, Forslund et al, (2011) find that inflationary history has no statistically significant effect on the composition of government debt.…”

Does Procyclical Fiscal Policy Reinforce Incentives to Dollarize Sovereign Debt?

“…For example, an empirical study by Mehl and Reynaud (2008) found the domestic "original sin" to be closely related to high inflation, high debt service-to-GDP ratio and narrow investor base. Using the same dataset as the one used in this paper, Guscina (2008) showed that domestic "original sin" decreases with the level of financial development, improvement in the quality of institutions, and achievement of macroeconomic stability. …”

“…As noted in Guscina (2008), there seems to be a certain threshold level of inflation that induces government to issue CPI-indexed debt.…”

Debt Build-up in Frontier Low-Income Developing Countries (LIDCs) since 2012: Global or Country-specific Factors and Way Forward?

“… See Anaya and Pienkowski (2015) for an analysis of debt dynamics concerning public debt.11See Adler, Magud, and Werner (2017) for an empirical analysis on terms of trade cycles and the external adjustment.12 SeeGuscina (2008) for an analysis on the impact of political and institutional factors on the structure of government debt in emerging markets.©International Monetary Fund. Not for Redistribution…”