Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics
Tamon Asonuma ()
No 2016/037, IMF Working Papers from International Monetary Fund
Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign’s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.
Keywords: WP; exchange rate; foreign currency; Sovereign Defaults; External Debt; Real Exchange Rate; Currency Composition of Debt; Bond Spreads; default probability; default choice; exchange rate depreciation; default period; GDP ratio; meaning appreciation; tradable goods; business cycle; Real exchange rates; Consumption; Depreciation; Currencies; Foreign currency debt; Global (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden
Working Paper: Sovereign defaults, external debt and real exchange rate dynamics (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2016/037
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().