Sovereign Defaults: The Role of Volatility
September 1, 2002
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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.
Subject: Debt default, Exchange restrictions, External debt, Fiscal policy, Fiscal stance, Foreign exchange, International trade, Terms of trade
Keywords: Africa, Asia and Pacific, credit standing, debt, Debt default, emerging market government, Emerging Markets, Exchange restrictions, Fiscal stance, government balance, Macroeconomic Volatility, Policy volatility variable, short-term debt, Sovereign Debt, Terms of trade, terms of trade change, terms of trade trade cycle, terms of trade variation, terms of trade volatility, WP
Pages:
26
Volume:
2002
DOI:
Issue:
149
Series:
Working Paper No. 2002/149
Stock No:
WPIEA1492002
ISBN:
9781451856903
ISSN:
1018-5941
