Sovereign debt responses to the COVID-19 pandemic

Zheng, Huanhuan

Sovereign debt responses to the COVID-19 pandemic

Journal of International Economics, 2023, vol. 143, issue C

Abstract: We utilize the global natural experiment created by the COVID-19 outbreak to identify sovereign borrowing capacity in time of need and its determinants. First, we demonstrate that the pandemic creates exogeneous shocks to sovereign borrowing needs—governments borrowed more when hit by more severe pandemic shocks. Second, we show that credible fiscal rules enhance sovereign borrowing capacity, while unsustainable debts in terms of high debt-to-GDP ratio, rollover risk, and sovereign default risk weaken it. Third, we find that, in response to the same pandemic shock, sovereign spreads increase more in emerging economies than advanced economies though the former borrow less during the pandemic. Finally, further analysis reveals that pegged exchange rate regimes, open capital accounts, and monetary dependence improve emerging economies' borrowing capacity.

Keywords: Sovereign debt; Fiscal policy; Fiscal rule; Sovereign bond; Debt overhang; Rollover risk (search for similar items in EconPapers)
JEL-codes: E62 E65 F34 H50 H63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:143:y:2023:i:c:s0022199623000521

DOI: 10.1016/j.jinteco.2023.103766

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