Volatility and the Debt-Intolerance Paradox

Luis Catão and Sandeep Kapur
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Luis Catão: International Monetary Fund

IMF Staff Papers, 2006, vol. 53, issue 2, pages 1

Abstract: A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign reputation and countries' distinct credit histories. This paper provides theoretical and empirical evidence to show that differences in underlying macroeconomic volatility are key. While volatility increases the need for international borrowing to help smooth domestic consumption, the ability to borrow is constrained by the higher default risk that volatility engenders. Copyright 2006, International Monetary Fund

JEL-codes: C23 F34 (search for similar items in EconPapers)
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