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What drives the commodity-sovereign risk dependence in emerging market economies?

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  • Boehm, Hannes
  • Eichler, Stefan
  • Giessler, Stefan

Abstract

Using daily data for 34 emerging markets in the period 1994–2016, we find robust evidence that higher export commodity prices are associated with lower sovereign default risk, as measured by lower EMBI spreads. The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find that, first, commodity dependence is higher for countries that export large volumes of commodities, whereas other portfolio characteristics like volatility or concentration are less important. Second, commodity-sovereign risk dependence increases in times of recessions and expansionary U.S. monetary policy. Third, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Fourth, the country’s government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity dependence.

Suggested Citation

  • Boehm, Hannes & Eichler, Stefan & Giessler, Stefan, 2021. "What drives the commodity-sovereign risk dependence in emerging market economies?," Journal of International Money and Finance, Elsevier, vol. 111(C).
  • Handle: RePEc:eee:jimfin:v:111:y:2021:i:c:s0261560620302643
    DOI: 10.1016/j.jimonfin.2020.102308
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    More about this item

    Keywords

    Sovereign bond prices; Commodity prices; International finance; Emerging market economies; Institutions; U.S. monetary policy;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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