Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Author/Editor:

Zhanwei Z. Yue ; Samir Jahjah

Publication Date:

November 1, 2004

Electronic Access:

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Disclaimer: 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

Summary:

We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.

Series:

Working Paper No. 04/210

Subject:

English

Publication Date:

November 1, 2004

ISBN/ISSN:

9781451874822/1018-5941

Stock No:

WPIEA2102004

Format:

Paper

Pages:

36

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