Balance sheet effects and the country risk premium: an empirical investigation
This 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.
|Date of creation:||Dec 2003|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.bde.es/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001.
"A Corporate Balance Sheet Approach to Currency Crises,"
CEPR Discussion Papers
3092, C.E.P.R. Discussion Papers.
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November.
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A corporate Balance-Sheet Approach to Currency Crises," Working Papers 01.05, Swiss National Bank, Study Center Gerzensee.
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A Corporate Balance-Sheet Approach to Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.14, Université de Lausanne, Faculté des HEC, DEEP.
- Hoyt Bleakley & Kevin Cowan, 2005.
"Corporate Dollar Debt and Depreciations: Much Ado About Nothing?,"
Research Department Publications
4411, Inter-American Development Bank, Research Department.
- Hoyt Bleakley & Kevin Cowan, 2008. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 612-626, November.
- Hoyt Bleakley & Kevin Cowan, 2005. "Corporate Dollar Debt and Depreciations: Much Ado about Nothing?," IDB Publications (Working Papers) 6693, Inter-American Development Bank.
- Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston.
- Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2001.
"External constraints on monetary policy and the financial accelerator,"
Federal Reserve Bank of San Francisco, issue Mar.
- Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
- Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
- Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
- Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
- Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004.
"Balance Sheets and Exchange Rate Policy,"
American Economic Review,
American Economic Association, vol. 94(4), pages 1183-1193, September.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Calvo, Guillermo A, 2001.
"Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 33(2), pages 312-34, May.
- Guillermo A. Calvo, 2001. "Capital markets and the exchange rate with special reference to the dollarization debate in Latin America," Proceedings, Federal Reserve Bank of Cleveland, pages 312-338.
- Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001.
"Why do countries float the way they float?,"
Journal of Development Economics,
Elsevier, vol. 66(2), pages 387-414, December.
- Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications (Working Papers) 6467, Inter-American Development Bank.
- Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
- repec:idb:wpaper:418 is not listed on IDEAS
- Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
When requesting a correction, please mention this item's handle: RePEc:bde:wpaper:0316. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.