Winners and Losers from Sovereign Debt Inflows

60 Pages Posted: 8 Jan 2020 Last revised: 11 May 2020

See all articles by Fernando Broner

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Lorenzo Pandolfi

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Tomas Williams

George Washington University; George Washington University - Elliott School of International Affairs (ESIA)

Date Written: May 8, 2020

Abstract

We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries which are due to the announcements of these countries' inclusion in two major local currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous spillovers on domestic firms. Financial and government-related firms experience positive abnormal returns in the days following the announcement episodes. Instead, companies operating in tradable industries exhibit negative abnormal returns after the episodes. We find that the former expansionary effect is more pronounced in countries where the government bond yields drop more in response to the announcement, while the latter recessionary effect is larger in countries where the domestic currency appreciates more. Also, we find that firms which rely more on external financing are positively affected by these events. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in recipient countries. They suggest that these inflows can contribute to reshaping the domestic economy, by increasing the importance of the non-tradable sector at the expenses of the tradable one.

Keywords: sovereign debt; capital inflows; exchange rate; government bond yields; stock prices; emerging markets

JEL Classification: F31, F32, F36, G15, G23

Suggested Citation

Broner, Fernando and Martin, Alberto and Pandolfi, Lorenzo and Williams, Tomas, Winners and Losers from Sovereign Debt Inflows (May 8, 2020). Available at SSRN: https://ssrn.com/abstract=3510264 or http://dx.doi.org/10.2139/ssrn.3510264

Fernando Broner

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

London
United Kingdom
+34 93 542 2601 (Phone)

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lorenzo Pandolfi

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Tomas Williams (Contact Author)

George Washington University ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

HOME PAGE: http://tomas-williams.com/

George Washington University - Elliott School of International Affairs (ESIA) ( email )

2201 G Street, N.W.
Washington, DC 20052
United States

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