Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

42 Pages Posted: 19 Jul 2012 Last revised: 23 Jul 2012

See all articles by Samir Jahjah

Samir Jahjah

International Monetary Fund - INS

Vivian Z. Yue

Emory University; Federal Reserve Bank of Atlanta

Bin Wei

Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: June 12, 2012

Abstract

This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued.

Keywords: Sovereign Bond Spread, Exchange Rate Regime, Overvaluation, Debt Crisis

JEL Classification: E58, F31, F33, F34

Suggested Citation

Jahjah, Samir and Yue, Vivian and Wei, Bin, Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries (June 12, 2012). FRB International Finance Discussion Paper No. 1049. Available at SSRN: https://ssrn.com/abstract=2111999 or http://dx.doi.org/10.2139/ssrn.2111999

Samir Jahjah

International Monetary Fund - INS ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-3682 (Phone)
202-589-6823 (Fax)

Vivian Yue (Contact Author)

Emory University ( email )

1602 Fishburne Dr
Atlanta, GA 30327
United States

HOME PAGE: http://vivianyue.com

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Bin Wei

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

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