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Volatility and the Debt-Intolerance Paradox

Author

Listed:
  • Luis Catão

    (International Monetary Fund)

  • Sandeep Kapur

    (International Monetary Fund)

Abstract

A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries 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. Copyright 2006, International Monetary Fund

Suggested Citation

  • Luis Catão & Sandeep Kapur, 2006. "Volatility and the Debt-Intolerance Paradox," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 1-1.
  • Handle: RePEc:pal:imfstp:v:53:y:2006:i:2:p:1
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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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