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The Sovereign Default Risk of Giant Oil Discoveries

Author

Listed:
  • Carlos Esquivel

    (Rutgers University)

Abstract

I study the impact of giant oil field discoveries on default risk. I document that interest rate spreads of emerging economies increase by 1.3 percentage points following a discovery of median size. I develop a sovereign default model with investment, three-sector production, and oil discoveries. Following a discovery, borrowing and investment increase. Capital reallocates from manufacturing toward oil and non-traded sectors, increasing the volatility of tradable income. Borrowing increases default risk and higher volatility increases the risk premium, both of which increase spreads. Discoveries generate welfare gains of 0.44 percent. Insurance against low oil prices increases these gains to 0.60. Select number of author(s): : 1

Suggested Citation

  • Carlos Esquivel, 2024. "The Sovereign Default Risk of Giant Oil Discoveries," Departmental Working Papers 202404, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:202404
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    File URL: http://www.sas.rutgers.edu/virtual/snde/wp/2024-04.pdf
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    References listed on IDEAS

    as
    1. Enrique G. Mendoza, 2005. "Real Exchange Rate Volatility and the Price of Nontradable Goods in Economies Prone to Sudden Stops," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2005), pages 103-148, August.
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    More about this item

    Keywords

    Soveriegn default; Oil Discoveries;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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