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Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

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  • Miss Zhanwei Z. Yue
  • Mr. Samir Jahjah

Abstract

We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.

Suggested Citation

  • Miss Zhanwei Z. Yue & Mr. Samir Jahjah, 2004. "Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries," IMF Working Papers 2004/210, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/210
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    More about this item

    Keywords

    WP; exchange rate; exchange rate misalignment; bond issue; Sovereign Credit Spreads; Exchange Rate Regimes; Overvaluation; Debt Crises; regime classification; × INT; bond issue probability; regime country; × float; exchange rate overvaluation; misalignment × FIX; Exchange rate arrangements; Exchange rates; Exchange rate policy; Yield curve; Global;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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