We are very grateful to two anonymous referees and Pok-sang Lam (the Editor) for offering many insightful comments and suggestions that have improved the paper immensely. We would like to thank Frank Diebold, Charles Engel, Mark Gertler, Martin Uribe, Jenny Xu, and the participants at the IMF Institute Seminar and the Hong Kong Institute for Monetary Research Eighth HKIMR Summer Workshop for their comments. We thank Carmen Reinhart for providing us with the data on crises. The authors are responsible for all errors and omissions. The views expressed in this paper are those of the authors and do not represent those of the Federal Reserve System or IMF.
Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries
Version of Record online: 9 SEP 2013
© 2013 The Ohio State University
Journal of Money, Credit and Banking
Volume 45, Issue 7, pages 1275–1300, October 2013
How to Cite
JAHJAH, S., WEI, B. and YUE, V. Z. (2013), Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries. Journal of Money, Credit and Banking, 45: 1275–1300. doi: 10.1111/jmcb.12052
- Issue online: 9 SEP 2013
- Version of Record online: 9 SEP 2013
- Manuscript Accepted: 24 AUG 2012
- Manuscript Received: 21 MAR 2007
- sovereign bond spread;
- exchange rate regime;
- debt crisis
This paper analyzes how exchange rate policy affects the issuance and pricing of sovereign bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher spreads and are less likely to issue bonds. Changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 5.5% and increases the spread by 88 basis points on average. Countries with real overvaluation have higher spreads and higher bond issuance probabilities. The effects of real overvaluation on sovereign bonds tend to be magnified for countries with fixed exchange rate regimes.