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  • Luis Catão
  • Sandeep Kapur

Abstract

A striking feature of sovereign lending is that many countries with moderate debt-to-income ratios systematically face higher spreads and more stringent borrowing constraints than others 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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/51.

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Length: 34
Date of creation: 01 Mar 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/51

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Keywords: Sovereign debt; Emerging markets; External debt; probability; statistics; debt intolerance; probabilities; equation; repayments; sovereign borrower; statistical significance; serial defaulters; debt ratios; heteroscedasticity; debt threshold; international borrowing; debt servicing; debt statistics; debt service; forecasting; optimization; debt crisis; sovereign defaults; debt service to export; standard deviation; standard deviations; ratio of debt; debt contract; calibrations; debt burden; debt burdens; outlier; international debt; debt crises; external borrowing; correlation; statistic; external obligations; debt accumulation; dummy variable; ratio of debt service to exports; central bank; logit analysis; maximum likelihood method; linear time; linear time trend; debt servicing capacity; market debt; descriptive statistics; survey; probability distribution; outliers; debt maturity; maximum likelihood methods; debt ratio; econometrics; prediction; normal distribution; debt problem; multilateral debt; debt service to exports; financial statistics; private sector debt; international lending; ratios of debt; parsimonious model; estimation technique; public debts;

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References

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  1. Kose, M. Ayhan & Riezman, Raymond, 2001. "Trade shocks and macroeconomic fluctuations in Africa," Journal of Development Economics, Elsevier, Elsevier, vol. 65(1), pages 55-80, June.
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  3. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," EUI-RSCAS Working Papers, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS) 18, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  4. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers, Stockholm - International Economic Studies 411, Stockholm - International Economic Studies.
  5. Maddala,G. S., 1986. "Limited-Dependent and Qualitative Variables in Econometrics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521338257.
  6. 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.
  7. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
  8. Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
  9. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 329-368.
  10. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  11. Carmen M. Reinhart, 2002. "Default, Currency Crises, and Sovereign Credit Ratings," World Bank Economic Review, World Bank Group, World Bank Group, vol. 16(2), pages 151-170, August.
  12. Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, American Economic Association, vol. 74(4), pages 726-34, September.
  13. Barry J. Eichengreen & Richard Portes, 1985. "Debt and Default in the 1930s: Causes and Consequences," NBER Working Papers 1772, National Bureau of Economic Research, Inc.
  14. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
  15. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
  16. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  17. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  18. Ricardo J. Caballero, 2000. "Macroeconomic Volatility in Latin America: A View and Three Case Studies," NBER Working Papers 7782, National Bureau of Economic Research, Inc.
  19. Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, Elsevier, vol. 4(1), pages 25-38, February.
  20. Christopher Blattman & Jason Hwang & Jeffrey G. Williamson, 2003. "The Terms of Trade and Economic Growth in the Periphery 1870-1938," NBER Working Papers 9940, National Bureau of Economic Research, Inc.
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