WHAT MAKES BALANCE SHEET EFFECTS DETRIMENTAL FOR THE COUNTRY RISK PREMIUM?

Alicia Garcia Herrero and Juan Carlos Berganza ()

International Finance from University Library of Munich, Germany

Abstract: This paper builds upon the empirical literature on the macroeconomic impact of real exchange rate depreciations for a sample of 27 emerging economies. We find that real exchange rate depreciations tend to increase a country’s risk premium. This effect is neither linear nor symmetric: large real exchange depreciations are much more detrimental and real appreciations do not seem to reduce the risk premium. We also show that the main channels for the real exchange rate to affect country risk are external and domestic balance sheet effects, stemming from the sudden increase in the stock of external or domestic dollar-denominated debt, respectively. This is particularly the case in the countries with the largest financial imperfections. Competitiveness is not an important enough factor to outweigh this negative effect. Finally, fixed exchange rate regimes tend to amplify balance sheet effects, beyond the extent of real depreciation. The data indicates that it could be due to a larger accumulation of external debt under fixed regimes.

Keywords: balance sheet effects; financial accelerator theories; exchange rate regime (search for similar items in EconPapers)
JEL-codes: F3 F31 F34 F41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-08-06
New Economics Papers: this item is included in nep-ifn
Note: Type of Document - pdf; pages: 32
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: What makes balance sheet effects detrimental for the country risk premium? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0408002

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