Sovereign Defaults : The Role of Volatility

Author/Editor:

Bennett W Sutton ; Luis Catão

Publication Date:

September 1, 2002

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:

While the relationship between volatility and credit risk is central to much of the literature on finance and banking, it has been largely neglected in empirical macro studies on sovereign defaults. This paper presents new econometric estimates for a panel of 25 emerging market countries over 1970-2001, breaking down aggregate volatility into its external and domestic policy components. We find that countries with historically higher macroeconomic volatility are more prone to default, and particularly so if part of this volatility is policy-induced. Reducing policy volatility thus appears to be key to improving a country's credit standing.

Series:

Working Paper No. 02/149

Subject:

English

Publication Date:

September 1, 2002

ISBN/ISSN:

9781451856903/1018-5941

Stock No:

WPIEA1492002

Format:

Paper

Pages:

26

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