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Credit Rationing in Emerging Economies' Access to Global Capital Markets

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  • Edda Zoli
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    Abstract

    This paper tests empirically the theoretical prediction that the country premium paid by emerging economies on sovereign debt increases with the amount of debt up to a certain critical level, above which the supply of foreign funds becomes fixed. The results confirm this theoretical prediction. The approach developed in the paper is also used to test for the presence of moral hazard in international lending. The results indicate significant changes in the supply of funds curve consistent with the presence of moral hazard in the period immediately following the Mexican rescue operation, but not after the Russian non-bailout.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/70.

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    Length: 30
    Date of creation: 01 Apr 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/70

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    Related research

    Keywords: Sovereign debt; Moral hazard; Credit ceilings; Public debt; External debt; External borrowing; Risk premium; Interest costs; Supply elasticity; Emerging markets; Economic models; Access to capital markets; statistic; statistics; financial statistics; international financial statistics; bond; correlation; international reserves; international finance; equation; probability; equations; standard errors; international country risk guide; bonds; prediction; functional form; international interest rates; bond spreads; standard deviation; market bond; descriptive statistics; emerging market bond; predictions; dummy variable; emerging market bonds; financial markets; sovereign bond; linear models; eurobond; international capital markets; international capital; eurobonds; basic descriptive statistics; quadratic equation; explanatory power; significance level; international financial markets; instrumental variable; financial stability; instrumental variables; financial sector; statistical significance; time series; municipal bond market; derivative; bond index; nonlinear model; bond spread; significance levels; municipal bond; international bond;

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    References

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    1. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
    2. Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank.
    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    4. Walter B. Wriston, 1998. "Dumb Networks and Smart Capital," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), Winter.
    5. Brealey, R. A. & Kaplanis, E., 2004. "The impact of IMF programs on asset values," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 253-270, March.
    6. Gianluigi Ferrucci, 2003. "Empirical determinants of emerging market economies' sovereign bond spreads," Bank of England working papers 205, Bank of England.
    7. Huizinga, H.P., 1989. "The commercial bank claims on developing countries: How have the banks been affected?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-155107, Tilburg University.
    8. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
    9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    10. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
    11. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
    12. Feder, Gershon & Just, Richard E., 1977. "An analysis of credit terms in the eurodollar market," European Economic Review, Elsevier, vol. 9(2), pages 221-243.
    13. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
    14. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
    15. Sule Ozler & Guido Tabellini, 1991. "External Debt and Political Instability," NBER Working Papers 3772, National Bureau of Economic Research, Inc.
    16. Allan H. Meltzer, 1998. "Asian Problems and the IMF," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), pages 264-274, Winter.
    17. Nunnenkamp, Peter, 1999. "The moral hazard of IMF lending: Making a fuss about a minor problem?," Kiel Discussion Papers 332, Kiel Institute for the World Economy (IfW).
    18. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
    19. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    20. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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    Cited by:
    1. Burkhard Heer & Stefan Franz Schubert, 2011. "Unemployment and Debt Dynamics in a Highly Indebted Small Open Economy," CESifo Working Paper Series 3497, CESifo Group Munich.
    2. Garima Vasishtha & Taimur Baig & Manmohan S. Kumar & Edda Zoli, 2006. "Fiscal and Monetary Nexus in Emerging Market Economies," IMF Working Papers 06/184, International Monetary Fund.
    3. Ante Žigman & Boris Cota, 2011. "The impact of fiscal policy on government bond spreads in emerging markets," Financial Theory and Practice, Institute of Public Finance, vol. 35(4), pages 385-412.
    4. Fakhraddin Maroofi & Parviz Kafchehi, 2012. "The Influence of Oil Prices on an Oil-Importing Developing Economy," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(4), pages 66-82, October.
    5. Manmohan S. Kumar & Jirí Jonáš & David Hauner, 2007. "Policy Credibility and Sovereign Credit," IMF Working Papers 07/1, International Monetary Fund.
    6. David Hauner & Manmohan S. Kumar, 2005. "Financial Globalization and Fiscal Perfomance in Emerging Markets," IMF Working Papers 05/212, International Monetary Fund.
    7. Olivier Jeanne & Jeromin Zettelmeyer, 2004. "The Mussa Theorem," IMF Working Papers 04/192, International Monetary Fund.
    8. Schubert, Stefan F. & Turnovsky, Stephen J., 2011. "The impact of oil prices on an oil-importing developing economy," Journal of Development Economics, Elsevier, vol. 94(1), pages 18-29, January.
    9. Stefan Schubert & Stephen Turnovsky, 2011. "The Impact of Energy Prices on Growth and Welfare in a Developing Open Economy," Open Economies Review, Springer, vol. 22(3), pages 365-386, July.

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