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Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets
TL;DR: In this article, the role of terms of trade shocks in inducing output fluctuations and countercyclical spreads using a stochastic dynamic general equilibrium model of a small open economy is investigated.
Abstract: Emerging economies tend to experience larger fluctuations in their terms of trade, countercyclical interest rates and more default episodes than developed countries. These structural features might suggest a relevant role for world prices in driving country spreads. This paper studies the role of terms of trade shocks in inducing output fluctuations and countercyclical spreads using a stochastic dynamic general equilibrium model of a small open economy. The model predicts that default incentives and default premia are higher in recessions, as observed in the data. In a quantitative exercise, the model matches various features of emerging economies and can account for the dynamics of default episodes in these markets.
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01 Feb 1951
TL;DR: The Board of Governors' Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981 as discussed by the authors provides information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months.
Abstract: Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.
1,236 citations
TL;DR: In this paper, the authors extended the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long-duration bonds and showed that, when the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies, the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one-quarter bonds.
357 citations
Cites background from "Sovereign Default, Terms of Trade a..."
...2See, for instance, Aguiar and Gopinath (2006), Arellano (2008), Arellano and Ramanarayanan (2008), Bai and Zhang (2006), Benjamin and Wright (2008), Cuadra and Sapriza (2006, 2008), D’Erasmo (2008), Eyigungor (2006), Hatchondo et al. (2006, 2007, 2009), Lizarazo (2005, 2006), Mendoza and Yue…...
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TL;DR: In this article, the authors extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power, and show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions.
Abstract: We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power. We show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions. Under high political stability, political turnover enables the model to generate a weaker correlation between economic conditions and default decisions, a higher and more volatile spread, and lower borrowing levels after a default episode.
132 citations
TL;DR: In this article, the authors find that exogenous fluctuations in commodity prices follow a common dynamic factor structure and coexist with other driving forces, such as spillover effects from commodity prices to risk premia.
Abstract: Fluctuations in commodity prices are an important driver of business cycles in small emerging market economies (EMEs). We document how these fluctuations correlate strongly with the business cycle in EMEs. We then embed a commodity sector into a multi-country EMEs’ business cycle model where exogenous fluctuations in commodity prices follow a common dynamic factor structure and coexist with other driving forces. The estimated model assigns to commodity shocks 42 percent of the variance in income, of which a considerable part is linked to the common factor. A further amplification mechanism is a ”spillover” effect from commodity prices to risk premia.
92 citations
TL;DR: In this paper, a commodity sector is embedded into a multi-country EMEs business cycle model where exogenous fluctuations in commodity prices follow a common dynamic factor structure and coexist with other driving forces.
91 citations
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2,337 citations
"Sovereign Default, Terms of Trade a..." refers background or methods in this paper
...The logic is similar to Eaton and Gersovitz (1981)....
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...This paper extends the approach developed by Eaton and Gersovitz (1981) in their seminal research on international lending by analyzing the relationship between terms of trade fluctuations and endogenous default probabilities in a production economy....
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TL;DR: In this article, the authors adopt the Keynesian view that direct shocks to investment are important for business fluctuations, but incorporate them in a neo-classical framework where the rate of capital expenditure is fixed.
Abstract: The present paper adopts the Keynesian view that direct shocks to investment are important for business fluctuations, but incorporates them in a neo-classical framework where the rate of capital ut ...
2,208 citations
01 Feb 1951
TL;DR: The Board of Governors' Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981 as discussed by the authors provides information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months.
Abstract: Enclosed is a copy of the Board of Governors’ Semiannual Agenda of Regulations for the period August 1, 1980 through February 1, 1981. The Semiannual Agenda provides you with information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months, and is divided into three parts: (1) regulatory matters that the Board had considered during the previous six months on which final action has been taken; (2) regulatory matters that have been proposed for public comment and that require further Board consideration; and (3) regulatory matters that the Board may consider over the next six months.
1,236 citations
"Sovereign Default, Terms of Trade a..." refers background in this paper
...Oil represented 70 percent of the exports of Venezuela in 1998. regimes, and with the empirical study for Argentina and Ecuador in Broda and Tille (2003)....
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...Kose (2002), Broda (2003) and Broda and Tille (2003) also study the importance of terms of trade and economic fluctuations using various approaches but their models do not account either for endogenous default risk premia or interest rate spreads....
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Posted Content•
TL;DR: In this paper, the empirical relation between the interest rates that emerging economies face in international capital markets and their business cycles was investigated, showing that interest rate shocks alone can explain 50% of output fluctuations and can generate business cycle patterns consistent with the regularities described above and with the major booms and recessions in Argentina in the last two decades.
Abstract: This paper documents the empirical relation between the interest rates that emerging economies face in international capital markets and their business cycles The dataset used in the study includes quarterly data for Argentina during 1983-2000 and for Brazil, Mexico, Korea, and Philippines,during 1994-2000 In this sample, interest rates are very volatile, strongly countercyclical, and strongly positively correlated with net exports Output is very volatile and consumption is more volatile than output These regularities are common to all emerging economies in the sample, butare not observed in a developed economy such as Canada The paper presents a dynamic general equilibrium model of a small open economy, in which (i) firms have to pay for a fraction of the input bill before production takes place, and in which (ii) the labor supply is independent of consumptionUsing a version of the model calibrated to Argentina s economy, we find that interest rate shocks alone can explain 50% of output fluctuations and can generate business cycle patterns consistent with the regularities described above and with the major booms and recessions in Argentina in the last two decades We conclude that interest rates are an important factor for explaining businesscycles in emerging economies and further research should be devoted to fully understand their determination
1,167 citations
Posted Content•
TL;DR: In this article, the authors present the first systematic analysis of the determinants and impact of thesovereign credit ratings assigned by the two leading U.S.agencies, Moody's Investors Service and Standard and Poor's.
Abstract: n recent years, the demand for sovereign credit rat-ings—the risk assessments assigned by the creditrating agencies to the obligations of central govern-ments—has increased dramatically. More govern-ments with greater default risk and more companiesdomiciled in riskier host countries are borrowing in inter-national bond markets. Although foreign government offi-cials generally cooperate with the agencies, ratingassignments that are lower than anticipated often promptissuers to question the consistency and rationale of sover-eign ratings. How clear are the criteria underlying sover-eign ratings? Moreover, how much of an impact do ratingshave on borrowing costs for sovereigns?To explore these questions, we present the firstsystematic analysis of the determinants and impact of thesovereign credit ratings assigned by the two leading U.S.agencies, Moody’s Investors Service and Standard andPoor’s.
1,060 citations