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US Real Interest Rates and Default Risk in Emerging Economies

  • Nathan Foley-Fisher
  • Bernardo Guimaraes

We empirically analyse the appropriateness of indexing emerging market sovereign debt to US real interest rates. We find that policy-induced exogenous increases in US rates raise default risk in emerging market economies, as hypothesised in the theoretical literature. However, we also find evidence that omitted variables which simultaneously increase US real interest rates and reduce the risk of default dominate the hypothesised relationship. We can only conclude that it's not a good idea to index emerging market bonds to US real interest rates.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0952.

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Date of creation: Oct 2009
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Handle: RePEc:cep:cepdps:dp0952
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Carlo Rosa, 2011. "The Validity of the Event‐study Approach: Evidence from the Impact of the Fed's Monetary Policy on US and Foreign Asset Prices," Economica, London School of Economics and Political Science, vol. 78(311), pages 429-439, 07.
  2. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
  3. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.
  4. Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," NBER Working Papers 8794, National Bureau of Economic Research, Inc.
  5. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  6. Bernardo Guimaraes, 2008. "Optimal External Debt and Default," CEP Discussion Papers dp0847, Centre for Economic Performance, LSE.
  7. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2007. "How Sovereign is Sovereign Credit Risk?," NBER Working Papers 13658, National Bureau of Economic Research, Inc.
  8. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
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