Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries
November 1, 2004
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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.
Subject: Exchange rate arrangements, Exchange rate policy, Exchange rates, Financial crises, Financial services, Foreign exchange, Yield curve
Keywords: × float, × INT, bond issue, bond issue probability, Debt Crises, exchange rate, Exchange rate arrangements, exchange rate misalignment, exchange rate overvaluation, Exchange rate policy, Exchange Rate Regimes, Exchange rates, Global, misalignment × FIX, Overvaluation, regime classification, regime country, Sovereign Credit Spreads, WP, Yield curve
Pages:
36
Volume:
2004
DOI:
Issue:
210
Series:
Working Paper No. 2004/210
Stock No:
WPIEA2102004
ISBN:
9781451874822
ISSN:
1018-5941
