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The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads

Author

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  • Nazim Belhocine
  • Mr. Salvatore Dell'Erba

Abstract

How do financial markets respond to concerns over debt sustainability and the level of public debt in emerging markets? We introduce a measure of debt sustainability – the difference between the debt stabilizing primary balance and the primary balance–in an otherwise standard spread regression model applied to a panel of 26 emerging market economies. We find that debt sustainability is an important determinant of spreads. In addition, using a panel smooth transition regression model, we find that the sensitivity of spreads to debt sustainability doubles as public debt increases above 45 percent of GDP. These results suggest that market interest rates react more to debt sustainability concerns in a country with a high level of debt compared to a country with a low level of debt.

Suggested Citation

  • Nazim Belhocine & Mr. Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 2013/093, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/093
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    References listed on IDEAS

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    Cited by:

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    2. Alberto Locarno & Alessandro Notarpietro & Massimiliano Pisani, 2013. "Sovereign risk, monetary policy and fiscal multipliers: a structural model-based assessment," Temi di discussione (Economic working papers) 943, Bank of Italy, Economic Research and International Relations Area.
    3. Nandi, Aurodeep, 2019. "Fiscal deficit targeting alongside flexible inflation targeting: India’s fiscal policy transmission," Journal of Asian Economics, Elsevier, vol. 63(C), pages 1-18.
    4. Ngan Tran, 2019. "Asymmetric effects of fiscal balance on monetary variables: evidence from large emerging economies," Empirical Economics, Springer, vol. 57(3), pages 1045-1076, September.
    5. Sun, Lixin, 2015. "China’s Debt: Structure, Determinants and Sustainability," MPRA Paper 68548, University Library of Munich, Germany, revised Oct 2015.
    6. Huixin Bi & Ms. Wenyi Shen & Ms. Susan S. Yang, 2014. "Fiscal Limits, External Debt, and Fiscal Policy in Developing Countries," IMF Working Papers 2014/049, International Monetary Fund.
    7. Nicoletta Batini & Mr. Luc Eyraud & Miss Anke Weber, 2014. "A Simple Method to Compute Fiscal Multipliers," IMF Working Papers 2014/093, International Monetary Fund.
    8. Lau, Evan & Moll de Alba, Jaime & Liew, Kim-Hing, 2022. "Debt and economic growth in Asian developing countries," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 599-612.
    9. Masao Kumamoto & Juanjuan Zhuo, 2020. "Government Bond Market Integration in ASEAN Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(3), pages 289-312, March.
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    12. Tran, Ngan, 2018. "Debt threshold for fiscal sustainability assessment in emerging economies," Journal of Policy Modeling, Elsevier, vol. 40(2), pages 375-394.

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