Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued

Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued

Financial Stability and Fiscal Crises in a Monetary Union

The main tasks of central banks are to secure price and financial stability. These objectives can, in times of crises, conflict with one another, and the central bank may have to renounce one of them in order to secure the other. In a monetary union, this trade-off can be exacerbated by the presence of highly indebted countries or by the risk of loose fiscal policies. This paper offers a simple theoretical model that captures the trade-off. Different fiscal institutions are compared in order to evaluate their impact on the conduct of monetary policy. More specifically, the fiscal criteria of the Maastricht Treaty and the Pact for Stability and Growth in Europe are analyzed in light of this model. Fiscal mechanisms exist to help prevent or minimize the risk of fiscal crises and the corresponding risk of central bank financing and inflation.Public debt;Domestic debt;Economic models;Financial stability;central bank, inflation, monetary policy, monetary union, fiscal policy, fiscal crises, fiscal coordination, fiscal criteria, fiscal crisis, optimal monetary policy, debt service, budget constraint, fiscal discipline, government securities, monetary integration, monetary base, fiscal policies, fiscal transfers, monetary fund, taxation, excessive deficits, loose fiscal policies, money supply, monetary unions, monetary unification, tax policy, government budget constraint, public finance, government budget, european monetary union, fiscal federalism, fiscal implication, international monetary arrangements, fiscal institutions, budget deficit, loose monetary policy, monetary economics, monetary regimes, fiscal flows, fiscal relations, government borrowing constraints, fiscal deficits, intergovernmental fiscal relations, monetary regime, tax revenues, fiscal theory, primary budget deficit, public expenditure, monetary arrangements, money demand, tax revenue, tax avoidance, government expenditures, budget deficits, fiscal retrenchment, fiscal costs, fiscal mechanism, national budget, government primary budget deficit, fiscal soundness, monetary institution, level of debt service, fiscal regime, intergovernmental fiscal, tight monetary policy, budget constraints

Inflation, Debt, and Default in a Monetary Union

Depending on the preferences of the central bank, countries in a monetary union tend to accumulate less debt. This reduces the need for fiscal criteria such as debt ceilings. In a monetary union with an independent central bank and a sufficiently large number of relatively small members, investors will begin rationing credit to the government more rapidly, and an equilibrium with no inflation and no default exists. However, highly-indebted countries are more likely to default once they join a monetary union.Economic models;central bank, inflation, monetary union, monetary policy, public debt, debt accumulation, monetary integration, debt servicing, monetary fund, indebted countries, monetary regime, stock of debt, monetary unions, sovereign debt, excessive debt, money supply, government debt, monetary regimes, monetary economics, debt service, optimal monetary policy, debt management, public debt management, monetary unification, public finance, currency boards, central banks, loose monetary policy, reserve bank, domestic currency, amount of debt, money demand, monetary arrangements, domestic investors, monetary approach, government deficits, currency board, sovereign default, low debt, monetary authorities, monetary institutions, international lending, highly indebted countries, tight monetary policy

Exchange Rate Policy and Debt Crises in Emerging Economies

We explore a model intended to capture the interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt. We examine how the exchange rate affects the supply of short-term debt facing the government. We show that under a credible hard peg (currency board), default is a more likely outcome, even without an exceptionally large short-term debt, precisely because a devaluation is not an option. In a more conventional fixed peg, it can be optimal for the government to choose a level of the exchange rate that would be likely to result in partial or complete debt default. Depending on the exchange rate regime, multiple equilibria exist, in one of which the interest rate is high, the exchange rate is overvalued, output is low, and default is high. Under a hard peg, there is a unique equilibrium.Devaluation;External debt;Emerging markets;exchange rate, short-term debt, exchange rate policy, real exchange rate, debt service, debt crisis, exchange rate misalignment, long-term debt, real exchange rate misalignment, debt default, currency board, debt service obligations, sovereign debt, exchange rate overvaluation, currency crises, government debt, exchange rate changes, exchange rate depreciation, debt crises, nominal exchange rate, real exchange rate overvaluation, debt-service obligations, currency crisis, exchange rate peg, debt sustainability, exchange rate regime, exchange rate adjustments, international lending, exchange rate adjustment, public debt, currency risk, external borrowing, debt service payments, public sector debt, amount of debt, balance of payment, exchange rate change, central banks, reserve bank, balance of payment crises, exchange rate mechanism, domestic agent, effective exchange rate, central bank, international debt, debt outstanding, exchange rate flexibility, fixed exchange rate, external shocks, sovereign default, debt problems, overvalued exchange rate, sovereign borrowers, exchange rate policies, debt defaults, real effective exchange rate, exchange rate commitments, currency debt

Are Immigrant Remittance Flows a Source of Capital for Development?

There is a general presumption in the literature and among policymakers that immigrant remittances play the same role in economic development as foreign direct investment and other capital flows, but this is an open question. We develop a model of remittances based on the economics of the family that implies that remittances are not profit-driven, but are compensatory transfers, and should have a negative correlation with GDP growth. This is in contrast to the positive correlation of profit-driven capital flows with GDP growth. We test this implication of our model using a new panel data set on remittances and find a robust negative correlation between remittances and GDP growth. This indicates that remittances may not be intended to serve as a source of capital for economic development.

Are Immigrant Remittance Flows a Source of Capital for Development

The role of remittances in development and economic growth is not well understood. This is partly because the literatures on the causes and effects of remittances remain separate. We develop a framework that links the motivation for remittances with their effect on economic activity. Because remittances take place under asymmetric information and economic uncertainty, there exists a significant moral hazard problem. The implication is that remittances have a negative effect on economic growth. We test this prediction using panel methods on a large sample of countries. The results indicate that remittances do have a negative effect on economic growth, which indicates that the moral hazard problem in remittances is severe.Moral hazard;Economic growth;Capital flows;Salary remittances;remittances, worker, worker remittances, migration, remittance, wages, migrant, effects of remittances, workers ? remittances, wage, remitter, impact of remittances, uses of remittances, data on remittances, benefits, effect of remittances, remittance flows, remittance transfers, role of remittances, remitters, increase in remittances, recipients of remittances, compensation, private transfers, international remittances, migrant remittances, growth rate of remittances, remittance inflows, labor income, absence of remittances, wage rates, migrant workers ? remittances, migrants ? remittances, compensation of employees, remittances data, remittance arrangements, benefits of remittances, emigrant remittances, remittance transfer, immigrant remittance, wage rate, fixed ? remittances, uses of remittance, fixed remittances, inflow of remittances