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The Burden Of Debt: An Exploration Of Interest Rate Behavior In Latin America

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  • LILIANA ROJAS‐SUÁREZ
  • SEBASTIÁN SOTELO

Abstract

What determines the behavior of interest rates in Latin America? Is the recent sharp reduction in rates in the region just a transitory deviation from much higher long‐term rates? To answer these questions, this study raises two main hypotheses. First, external debt plays a central role in the sustainable behavior of domestic interest rates because it explains country risk. Second, country risk provides valuable information for predicting the behavior of exchange rate risk and not the other way around. Econometric tests confirm these hypotheses and lead to an important conclusion: unless important reforms (leading, for example, to improved tax‐collecting capacity or deeper local financial markets) are undertaken, highly indebted/high country‐risk economies will tend to be associated with high domestic interest rates. (JEL E43, G15, 016, 054, C22)

Suggested Citation

  • Liliana Rojas‐Suárez & Sebastián Sotelo, 2007. "The Burden Of Debt: An Exploration Of Interest Rate Behavior In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 25(3), pages 387-414, July.
  • Handle: RePEc:bla:coecpo:v:25:y:2007:i:3:p:387-414
    DOI: 10.1111/j.1465-7287.2007.00044.x
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    References listed on IDEAS

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    Cited by:

    1. Özcan Karahan & Olcay Çolak, 2012. "Does Uncovered Interest Rate Parity Hold in Turkey?," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 386-394.
    2. repec:beo:journl:v:62:y:2018:i:216:p:35-62 is not listed on IDEAS
    3. Zorica Mladenović & Jelena Rašković, 2018. "Econometric Testing Of Uncovered Interest Rate Parity In Serbia," Economic Annals, Faculty of Economics, University of Belgrade, vol. 63(216), pages 35-62, January –.
    4. Liliana Rojas-Suárez & José María Serena, 2015. "Changes in funding patterns by Latin American banking systems:how large? how risky?," Working Papers 1521, Banco de España.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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