Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

36 Pages Posted: 9 Feb 2006

See all articles by Samir Jahjah

Samir Jahjah

International Monetary Fund - INS

Vivian Z. Yue

Emory University; Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004


We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.

Keywords: Sovereign Credit Spreads, Exchange Rate Regimes, Overvaluation, Debt Crises

JEL Classification: E58, F31, F33, F34

Suggested Citation

Jahjah, Samir and Yue, Vivian, Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries (November 2004). IMF Working Paper No. 04/210, Available at SSRN:

Samir Jahjah (Contact Author)

International Monetary Fund - INS ( email )

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Vivian Yue

Emory University ( email )

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Federal Reserve Bank of Atlanta ( email )

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