## Pricing Sovereign Debt in Resource-Rich Economies

_IMF Working Papers, November 8, 2019_

## Source details

**Canonical URL:** [Pricing Sovereign Debt in Resource-Rich Economies](https://www.imf.org/en/publications/wp/issues/2019/11/08/pricing-sovereign-debt-in-resource-rich-economies-48708)

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2019/11/08/pricing-sovereign-debt-in-resource-rich-economies-48708_