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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

Abstract

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

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Bibliographic Info

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

Related research

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

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References

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  1. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2007. "How Sovereign is Sovereign Credit Risk?," NBER Working Papers 13658, National Bureau of Economic Research, Inc.
  2. Carlo Rosa, 2011. "The Validity of the Event‐study Approach: Evidence from the Impact of the Fed's Monetary Policy on US and Foreign Asset Prices," Economica, London School of Economics and Political Science, vol. 78(311), pages 429-439, 07.
  3. Bernardo Guimaraes, 2007. "Optimal external debt and default," 2007 Meeting Papers 104, Society for Economic Dynamics.
  4. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  5. Roberto Rigobon & Brian Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series 2002-4, Board of Governors of the Federal Reserve System (U.S.).
  6. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report 335, Federal Reserve Bank of Minneapolis.
  7. Martin Uribe & Vivian Z. Yue, 2003. "Country Spreads and Emerging Countries: Who Drives Whom?," NBER Working Papers 10018, National Bureau of Economic Research, Inc.
  8. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.
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Cited by:
  1. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.

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