EconPapers    
Economics at your fingertips  
 

Interest Rate Uncertainty and Sovereign Default Risk

Shahed Khan (), Alok Johri () and Cesar Sosa-Padilla ()

No 1192, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: As the United States emerged from the Great Recession, there was considerable uncer- tainty around the future direction of US monetary policy exemplified by the chatter and speculation around tapering of quantitative easing by the US Fed in the financial press. The increased uncertainty around the timing and speed of the tapering coincided with a sharp spike in the sovereign bond yields of several emerging economies. We explore the impact of an increase in interest rate uncertainty on the borrowing costs of a small open economy in an otherwise standard model of sovereign default, where spread is endogenous. We find that introducing time-varying volatility in the world interest rate (i.e. uncertainty shocks) the model predicts a mean sovereign spread that is 115% larger and 126% more volatile. The model also predicts that countries default more than twice as frequently. Moreover, the equilibrium debt-to-income ratio is 19% lower. The welfare gains from eliminating uncertainty about the world interest rate amount up to a 1.8% permanent increase in consumption. Overall, we find quantitative support for the widespread con- cerns regarding the uncertainty about when and how the Fed will unwind its quantitative easing.

Date: 2017
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2017/paper_1192.pdf (application/pdf)

Related works:
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2020) Downloads
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2020) Downloads
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2020) Downloads
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2018) Downloads
Working Paper: Interest Rate Uncertainty and Sovereign Default Risk (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1192

Access Statistics for this paper

More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2021-10-16
Handle: RePEc:red:sed017:1192