Balance Sheet Effects And The Country Risk Premium: An Empirical Investigation
AbstractThis paper investigates empirically whether there is a negative relationship between a country’s risk premium and the balance sheet effect, as implied by recent theories emphasizing financial imperfections. We find evidence that balance sheet effects, stemming from the increase in the external debt service after an unexpected real depreciation, significantly raise the risk premium. We also show that the increase in the risk premium is not due to the debt service as such. While the result holds for the whole sample, we show that it is mainly driven by those countries with the largest financial imperfections, as argued by imperfect capital market theories. Particularly large real depreciations also seem to be disproportionately important, meaning that the balance sheet effects may be strongest at times of economic crisis, when large devaluations occur.
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0403005.
Date of creation: 05 Mar 2004
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balance sheet effects; country risk premium; sovereign spreads;
Other versions of this item:
- Juan Berganza & Roberto Chang & Alicia Herrero, 2004. "Balance sheet effects and the country risk premium: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 592-612, December.
- Juan Carlos Berganza & Roberto Chang & Alicia García Herrero, 2003. "Balance sheet effects and the country risk premium: an empirical investigation," Banco de Espaï¿½a Working Papers 0316, Banco de Espa�a.
- F3 - International Economics - - International Finance
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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