Sovereign risk in emerging and advanced economies: The divergent roles of policy credibility and growth

Fatma Pınar Erdem and Gulcin Ozkan

Economics Letters, 2025, vol. 255, issue C

Abstract: We examine the key drivers of sovereign risk across 15 emerging and 14 advanced economies (EMs and AEs, respectively) using fixed-effects and Common Correlated Effects models to account for cross-sectional dependence. We find that in EMs, sovereign credit default swap (CDS) spreads are primarily influenced by monetary policy credibility, whereas in AEs, subdued economic growth is the predominant factor driving sovereign risk. These findings underscore the pressing need to bolster monetary policy credibility in EMs while highlighting the long-term economic consequences of sluggish growth in AEs, particularly in the post-global financial crisis era.

Keywords: Sovereign credit default swap spread; Monetary policy credibility; Emerging market economies; Cross-section dependence; Sovereign risk (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525003453

DOI: 10.1016/j.econlet.2025.112508

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