## Sovereign Defaults: The Role of Volatility

_IMF Working Papers, September 1, 2002_

## Source details

**Canonical URL:** [Sovereign Defaults: The Role of Volatility](https://www.imf.org/en/publications/wp/issues/2016/12/30/sovereign-defaults-the-role-of-volatility-15915)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/sovereign-defaults-the-role-of-volatility-15915/index.md)
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## Bibliographic details
- Authors: Bennett W Sutton, Luis Catão
- Published: September 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856903.001

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### 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).*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/sovereign-defaults-the-role-of-volatility-15915_