Sovereign Defaults the Role of Volatility

27 Pages Posted: 31 Jan 2006

See all articles by Luis Catão

Luis Catão

International Monetary Fund (IMF)

Bennett Sutton

International Monetary Fund (IMF)

Date Written: September 2002

Abstract

While the relationship between volatility and credit risk is central to much of the literature on finance and banking, it has been largely neglected in empirical macro studies on sovereign defaults. This paper presents new econometric estimates for a panel of 25 emerging market countries over 1970-2001, breaking down aggregate volatility into its external and domestic policy components. We find that countries with historically higher macroeconomic volatility are more prone to default, and particularly so if part of this volatility is policy-induced. Reducing policy volatility thus appears to be key to improving a country`s credit standing.

Keywords: Sovereign Debt, Macroeconomic Volatility, Emerging Markets

JEL Classification: F34, H63

Suggested Citation

Catão, Luis and Sutton, Bennett, Sovereign Defaults the Role of Volatility (September 2002). IMF Working Paper No. 02/149, Available at SSRN: https://ssrn.com/abstract=879960

Luis Catão (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Bennett Sutton

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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