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Term Spread Spillovers to Latin America and Emergence of the ‘Twin Ds’

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  • Giraldo, Carlos

    (Latin American Reserve Fund)

  • Giraldo, Iader

    (Latin American Reserve Fund)

  • Gomez-Gonzalez, Jose E.

    (City University of New York – Lehman College)

  • Uribe, Jorge M.

    (Universitat Oberta de Catalunya)

Abstract

This paper investigates the relationship between depreciation and default risks in five key Latin American markets—Brazil, Chile, Colombia, Peru, and Mexico—in response to shifts in the US yield curve slope. Excluding serial defaulters like Argentina, our focus lies on countries still susceptible to the Twin Ds phenomenon amidst high debt levels. We find that global economic spillovers significantly influence the Twin Ds in these markets; with fluctuations in the US term spread serving as an indicator of broader shifts in global economic conditions. Our analysis reveals asymmetric spillover effects, particularly during periods of positive and increasing spreads such as the Global Financial Crisis, where changes in the term spread disproportionately impact the depreciation tail in currency markets and the high-risk tail in sovereign CDS markets. Notably, such effects are absent in stock markets, which accentuate the particular dynamics of currency and sovereign debt markets. The asymmetry of spillover effects, although still present during the most recent Covid-19 crisis, was less pronounced, which may be linked to the accumulation of international FX reserves in the region during the last decades. Our findings emphasize the necessity of incorporating risk spillovers into policy frameworks, highlighting the dominance of risk spillovers over price spillovers and the obscured nature of shocks at the center of the variables’ distribution.

Suggested Citation

  • Giraldo, Carlos & Giraldo, Iader & Gomez-Gonzalez, Jose E. & Uribe, Jorge M., 2024. "Term Spread Spillovers to Latin America and Emergence of the ‘Twin Ds’," Documentos de trabajo 21169, FLAR.
  • Handle: RePEc:col:000566:021169
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    More about this item

    Keywords

    Risk spillovers; Price spillovers; US term spread; Twin Ds; Emerging markets;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises

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