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Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?

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Author Info
Eichengreen, Barry
Mody, Ashoka

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Abstract

Qualitative accounts have long emphasized the level of interest rates in the advanced industrial countries as a determinant of capital flows to emerging markets and spreads on external debt. Curiously, econometric studies relying on disaggregated data have lent little support to this hypothesis. Upon modelling the issue and pricing decisions jointly, we confirm that global credit conditions have an important impact on the market for developing-country debt. US rates have a negative impact on the demand by international investors for fixed-rate issues by Latin American borrowers, as predicted by the search-for-yield hypothesis. The same effect is apparent for East Asian floating-rate issues, although the evidence there is not as robust. But, whatever the region, this effect is evident only upon controlling for the impact of US interest rates on the decision of developing-country borrowers to issue debt. Copyright 1998 by Blackwell Publishers Ltd.

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Article provided by Blackwell Publishing in its journal International Finance.

Volume (Year): 1 (1998)
Issue (Month): 1 (October)
Pages: 35-57
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Handle: RePEc:bla:intfin:v:1:y:1998:i:1:p:35-57

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  1. Eichengreen, Barry & Mody, Ashoka, 1999. "Lending booms, reserves, and the sustainability of short-term debt - inferences from the pricing of syndicated bank loans," Policy Research Working Paper Series 2155, The World Bank. [Downloadable!]
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  2. Thomas Stratmann & Bernardin Akitoby, 2006. "Fiscal Policy and Financial Markets," IMF Working Papers 06/16, International Monetary Fund. [Downloadable!]
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  3. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2006. "Sudden Stops and IMF-Supported Programs," NBER Working Papers 12235, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Galina Hale, 2003. "Bonds or Loans? The Effect of Macroeconomic Fundamentals," Cowles Foundation Discussion Papers 1403, Cowles Foundation, Yale University, revised Sep 2005. [Downloadable!]
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  5. Roman Kraeussl, 2003. "Do Credit Rating Agencies Add to the Dynamics of Emerging Market Crises?," CFS Working Paper Series 2003/18, Center for Financial Studies. [Downloadable!]
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  6. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Gianluigi Ferrucci, . "Empirical determinants of emerging market economies' sovereign bond spreads," Bank of England working papers 205, Bank of England. [Downloadable!]
  8. Barry Eichengreen & Ashoka Mody, 2000. "Would Collective Action Clauses Raise Borrowing Costs?," NBER Working Papers 7458, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Steven B. Kamin & Karsten von Kleist, 1999. "The evolution and determinants of emerging market credit spreads in the 1990s," International Finance Discussion Papers 653, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Roman Kraeussl, 2003. "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," CFS Working Paper Series 2003/22, Center for Financial Studies. [Downloadable!]
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  11. Olcay Yucel Culha & Fatih Ozatay & Gulbin Sahinbeyoglu, 2006. "The Determinants of Sovereign Spreads in Emerging Markets," Working Papers 0604, Research and Monetary Policy Department, Central Bank of the Republic of Turkey. [Downloadable!]
  12. Marco Sorge & Blaise Gadanecz, 2008. "The term structure of credit spreads in project finance

    Supplementary material for this article can be found at ," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 68-81. [Downloadable!]

  13. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish: How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability," IMF Working Papers 09/108, International Monetary Fund. [Downloadable!]
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