Sovereign Defaults: The Role of Volatility
IMF Working Papers, September 1, 2002
Source details
- Canonical URL
- Sovereign Defaults: The Role of Volatility
Other formats
Bibliographic details
- Authors: Bennett W Sutton, Luis Catão
- Published: September 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856903.001
Research question and scope
- Investigates the relationship between macroeconomic volatility and sovereign default risk, a topic extensively studied in finance and banking literature but largely neglected in empirical macro studies on sovereign defaults.
- Empirical analysis covers a panel of 25 emerging market countries over 1970-2001.
- Breaks down aggregate volatility into external and domestic policy components.
Data and methods
- New econometric estimates for the 25-country panel over 1970-2001.
- Volatility decomposed into:
- External components (e.g., terms of trade volatility)
- Domestic policy-induced components (policy volatility variable)
Key findings
- Countries with historically higher macroeconomic volatility are more prone to default.
- Default propensity is particularly elevated when part of the volatility is policy-induced.
- Reducing policy volatility appears key to improving a country's credit standing.
Policy implications and recommendations
- Policy priority: Reduce policy volatility to lower sovereign default risk and improve credit standing.
- Focus areas implied by subject and keywords:
- Fiscal policy and fiscal stance (government balance)
- Management of exchange restrictions and foreign exchange policies
- Short-term debt management and external debt sustainability
- Monitoring and mitigating terms of trade volatility and terms of trade cycles
Selected publication metadata (as cited on the page)
- Authors: Bennett W Sutton, Luis Catão
- Date: September 1, 2002
- Series: Working Paper No. 2002/149
- Pages: 26
- DOI: https://doi.org/10.5089/9781451856903.001
- ISBN: 9781451856903
- ISSN: 1018-5941
Bennett W Sutton and Luis Catão, "Sovereign Defaults: The Role of Volatility", IMF Working Paper No. 2002/149 (September 1, 2002).
Content in this bundle
- Sovereign Defaults: The Role of Volatility - WP/02/149