U.S. Real Interest Rates and Default Risk in Emerging Economies

Authors

  • NATHAN FOLEY-FISHER,

  • BERNARDO GUIMARAES


  • The authors thank seminar participants at the EBRD and two anonymous referees for helpful suggestions. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

Abstract

This paper empirically investigates the impact of changes in U.S. real interest rates on sovereign default risk in emerging economies using the method of identification through heteroskedasticity. Policy-induced increases in U.S. interest rates starkly raise default risk in emerging market economies. However, the overall correlation between U.S. real interest rates and the risk of default is negative, demonstrating that the effects of other variables dominate the anterior relationship.

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