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US Real Interest Rates and Default Risk in Emerging Economies

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Author Info
Nathan Foley-Fisher
Bernardo Guimaraes

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Abstract

We empirically analyse the appropriateness of indexing emerging market sovereign debt toUS real interest rates. We find that policy-induced exogenous increases in US rates raisedefault risk in emerging market economies, as hypothesised in the theoretical literature.However, we also find evidence that omitted variables which simultaneously increase US realinterest rates and reduce the risk of default dominate the hypothesised relationship. We canonly conclude that it's not a good idea to index emerging market bonds to US real interestrates.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0952.

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Date of creation: Oct 2009
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Handle: RePEc:cep:cepdps:dp0952

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Related research
Keywords: real interest rates; default; sovereign debt; identification through heteroskedasticity;

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

References listed on IDEAS
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  1. Bernardo Guimaraes, 2008. "Optimal External Debt and Default," CEP Discussion Papers dp0847, Centre for Economic Performance, LSE. [Downloadable!]
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  2. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November. [Downloadable!] (restricted)
    Other versions:
  3. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June. [Downloadable!] (restricted)
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This page was last updated on 2009-12-13.

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