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Volatility and the Debt-Intolerance Paradox

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Author Info
Luis Catão (International Monetary Fund)
Sandeep Kapur (International Monetary Fund)

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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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Publisher Info
Article provided by Palgrave Macmillan Journals 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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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

Cited by:
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  1. Elena Loukoianova & Cheng Hoon Lim & Samuel Malone & Dale F. Gray, 2008. "A Risk-Based Debt Sustainability Framework: Incorporating Balance Sheets and Uncertainty," IMF Working Papers 08/40, International Monetary Fund. [Downloadable!]
  2. Philipp Paulus, 2006. "The final blow to the Stability Pact? EMU enlargement and government debt," Otto-Wolff-Institut Discussion Paper Series 03/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland. [Downloadable!]
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This page was last updated on 2009-11-30.

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