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Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

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Author Info

  • Vivian Z. Yue
  • Samir Jahjah

Abstract

We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/210.

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Length: 36
Date of creation: 01 Nov 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/210

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Keywords: Exchange rate regimes; Bond issues; Developing countries; Economic models; exchange rate; exchange rate misalignment; bond spreads; bond issue; sovereign bonds; real exchange rate; flexible exchange rate; exchange rate arrangements; exchange rate devaluation; bond market; exchange rate flexibility; currency crises; intermediate exchange rate; bond; exchange rate policy; bonds; exchange rate regime; exchange rate overvaluation; overvaluation; sovereign bond; nominal exchange rate; fixed exchange rate; real exchange rate overvaluation; exchange rate regime classification; exchange rate appreciation; exchange rate adjustment; bond issuing; exchange rate arrangement; real exchange rate misalignment; fixed exchange rate regime; flexible exchange rate regime; intermediate exchange rate regime; exchange rates; international finance; bond issuer; bond markets; real exchange rate appreciation; exchange rate misalignments; flexible exchange rates; nominal devaluation; global bond; global bond market; overvalued exchange rate; international country risk guide; bond financing; bond default risk; limited exchange rate flexibility; exchange rate instrument; bond index; effective exchange rate; real exchange rates; exchange rate policies; international bond markets; floating exchange rate regime; demand for bonds; individual bonds; bond defaults; aggregate exchange rate; bond issue decisions; bond issuance; bond spread; international financial statistics; exchange rate classifications; exchange rate level; sovereign bond market; official exchange rate; real effective exchange rate; exchange rate path; treasury bonds; rigid exchange rate regimes; alternative exchange rate; floating exchange rate; de facto exchange rate regime; bond default; exchange rate dummies; treasury bond; fixed exchange rate country; de facto exchange rate regimes; international bond; bond issuers; exchange rate regime classifications; foreign exchange; history of exchange rate;

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Citations

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Cited by:
  1. Kimakova, Alena, 2008. "The political economy of exchange rate regime determination: Theory and evidence," Economic Systems, Elsevier, Elsevier, vol. 32(4), pages 354-371, December.
  2. Wälti, Sébastien & Weder, Ghislaine, 2009. "Recovering from bond market distress: Good luck and good policy," Emerging Markets Review, Elsevier, Elsevier, vol. 10(1), pages 36-50, March.
  3. Lee, Hei Wai & Xie, Yan Alice & Yau, Jot, 2011. "The impact of sovereign risk on bond duration: Evidence from Asian sovereign bond markets," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(3), pages 441-451, June.
  4. Inci Gumus, 2011. "Exchange Rate Policy and Sovereign Spreads in Emerging Market Economies," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 19(4), pages 649-663, 09.
  5. Alex Luiz Ferreira, 2007. "On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(1), pages 43-54.
  6. Nazim Belhocine & Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 13/93, International Monetary Fund.
  7. Bernardin Akitoby & Thomas Stratmann, 2008. "Fiscal Policy and Financial Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(533), pages 1971-1985, November.

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