Pricing Sovereign Debt in Resource-Rich Economies
IMF Working Papers, November 8, 2019
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- Pricing Sovereign Debt in Resource-Rich Economies
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Bibliographic details
- Authors: Thomas McGregor
- Published: November 8, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513516431.001
Summary and research question
- Research question: How do oil price movements affect sovereign spreads in an oil-dependent economy?
- Methodology: Develops a stochastic general equilibrium model of an economy exposed to co-moving oil price and output processes, with endogenous sovereign default risk.
- Key claim: The model explains a large proportion of business cycle fluctuations in interest-rate spreads in oil-exporting emerging market economies, particularly the countercyclicallity of interest rate spreads and oil prices.
Main findings
- The model explains a large proportion of business cycle fluctuations in interest-rate spreads in oil-exporting emerging market economies.
- The model accounts for the countercyclicallity of interest rate spreads and oil prices.
- Factors that strengthen co-movements between risk premiums and the oil price:
- Higher risk-aversion.
- More impatient governments.
- Larger oil shares.
- A stronger correlation between domestic output and oil price shocks.
Model features and mechanisms
- Stochastic general equilibrium framework.
- Endogenous sovereign default risk.
- Economy exposed to co-moving oil price and output processes.
Policy-relevant implications
- Sovereign spreads in oil-exporting emerging markets are sensitive to oil price dynamics and domestic output correlations with oil prices.
- Countries with larger oil shares, higher government impatience, or higher risk-aversion face stronger procyclical movement in risk premiums associated with oil prices.
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- Working Paper