On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation

65 Pages Posted: 25 Apr 2017

See all articles by Julián Caballero

Julián Caballero

Inter-American Development Bank (IDB)

Andrés Fernández

Inter-American Development Bank (IDB)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016

Abstract

This paper studies the influence of external financial factors on economic activity in emerging economies (EMEs) motivated by a considerable increase in foreign financing by the corporate sector in EMEs since the early 2000s, mainly in the form of bond issuance. A quarterly external financial indicator for several EMEs is built using bond-level data on spreads of corporate bonds issued in foreign capital markets, and its relationship with economic activity is examined. Results show that the indicator has considerable predictive power on future economic activity. Furthermore, an identified adverse shock to the financial indicator generates a large and protracted fall in real output growth, and about a third of its forecast error variance is associated with this shock. These findings are robust to controlling for possible spillovers from sovereign to corporate risk, among other considerations.

Keywords: Corporate bonds, Options adjusted spread, Economic activity, Emerging economies

JEL Classification: E32, E37, F34, F37, G15

Suggested Citation

Caballero, Julián and Fernández, Andrés, On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation (August 2016). IDB Working Paper No. IDB-WP-719, Available at SSRN: https://ssrn.com/abstract=2956699 or http://dx.doi.org/10.2139/ssrn.2956699

Julián Caballero (Contact Author)

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

Andrés Fernández

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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