Interest Rate Uncertainty and Sovereign Default Risk

Alok Johri, Shahed Khan and Cesar Sosa-Padilla

No 27639, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Empirical studies suggest that fluctuations in the level and volatility of the world interest rate affect sovereign spreads in emerging economies. We incorporate an estimated time-varying process for the world interest rate (with both level and volatility shocks) into a model of sovereign default calibrated to a panel of emerging economies. Time variation in the world interest rate interacts with default incentives in the model and leads to state contingent effects similar to the empirical literature. On average, in response to a rise in the world interest rate the model delivers a 1.4 times increase in the spread. The volatility state has a major impact on this average – the increase in spreads is much larger in high volatility states. Moreover, we show that fluctuations in the world interest rate can generate considerable co-movement in sovereign yields across nations, as seen in the data.

JEL-codes: E32 E43 F34 F41 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ore
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Alok Johri & Shahed Khan & César Sosa-Padilla, 2022. "Interest rate uncertainty and sovereign default risk," Journal of International Economics, .

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Related works:
Journal Article: Interest rate uncertainty and sovereign default risk (2022)
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2020)
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2020)
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2018)
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2017)
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2016)
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