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Volatility and the Debt-Intolerance Paradox

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  • Luis Catão

    (International Monetary Fund)

  • Sandeep Kapur

    (International Monetary Fund)

Abstract

A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign reputation and countries' distinct credit histories. This paper provides theoretical and empirical evidence to show that differences in underlying macroeconomic volatility are key. While volatility increases the need for international borrowing to help smooth domestic consumption, the ability to borrow is constrained by the higher default risk that volatility engenders. Copyright 2006, International Monetary Fund

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 53 (2006)
Issue (Month): 2 ()
Pages: 1

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Handle: RePEc:pal:imfstp:v:53:y:2006:i:2:p:1

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  1. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(1), pages 49-123, January.
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  8. Pierre-Richard Agénor & Joshua Aizenman, 1998. "Contagion and Volatility with Imperfect Credit Markets," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 207-235, June.
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Citations

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Cited by:
  1. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2010. "International Government Debt," UNCTAD Discussion Papers, United Nations Conference on Trade and Development 199, United Nations Conference on Trade and Development.
  2. Catão, Luis A.V. & Fostel, Ana & Kapur, Sandeep, 2009. "Persistent gaps and default traps," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 271-284, July.
  3. Zaman, Gheorghe & Georgescu, George, 2011. "Sovereign risk and debt sustainability: warning levels for Romania," MPRA Paper 32924, University Library of Munich, Germany.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
  5. Philipp Paulus, 2006. "The final blow to the Stability Pact? EMU enlargement and government debt," Otto-Wolff-Institut Discussion Paper Series, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland 03/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
  6. Daude, Christian, 2012. "Sovereign default risk and volatility," Economics Letters, Elsevier, Elsevier, vol. 114(1), pages 47-50.
  7. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics, University of Bergen, Department of Economics 01/14, University of Bergen, Department of Economics.
  8. International Monetary Fund, 2012. "Commodity Price Volatility and the Sources of Growth," IMF Working Papers, International Monetary Fund 12/12, International Monetary Fund.
  9. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework," IMF Working Papers, International Monetary Fund 08/40, International Monetary Fund.
  10. Roberto Savona & Marika Vezzoli, 2012. "Fitting and Forecasting Sovereign Defaults Using Multiple Risk Signals," Working Papers 2012_26, Department of Economics, University of Venice "Ca' Foscari".
  11. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, European Finance Association, vol. 14(2), pages 235-262.
  12. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers, International Monetary Fund 12/203, International Monetary Fund.
  13. Ana Fostel & Sandeep Kapur & Luis Catão, 2007. "Persistent Gaps, Volatility Types, and Default Traps," IMF Working Papers, International Monetary Fund 07/148, International Monetary Fund.
  14. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working Papers, Factor Markets, Centre for European Policy Studies 122846, Factor Markets, Centre for European Policy Studies.
  15. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers, Centre for European Policy Studies 123, Centre for European Policy Studies.
  16. Nancy P. Marion & Robert P. Flood, 2006. "Getting Shut Out of the International Capital Markets," IMF Working Papers, International Monetary Fund 06/144, International Monetary Fund.
  17. Luis A. V. Catão, 2007. "Sudden Stops and Currency Drops: A Historical Look," NBER Chapters, National Bureau of Economic Research, Inc, in: The Decline of Latin American Economies: Growth, Institutions, and Crises, pages 243-290 National Bureau of Economic Research, Inc.
  18. Luis Catão, 2006. "Sudden Stops and Currency Drops," IMF Working Papers, International Monetary Fund 06/133, International Monetary Fund.

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