Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics

February 25, 2016

Preview Citation

Format: Chicago

Tamon Asonuma. Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics, (USA: International Monetary Fund, 2016) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign’s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.

Subject: Consumption, Currencies, Depreciation, External debt, Foreign currency debt, Foreign exchange, Money, National accounts, Real exchange rates, Yield curve

Keywords: Bond Spreads, Business cycle, Consumption, Currencies, Currency Composition of Debt, Default choice, Default period, Default probability, Depreciation, Exchange rate, Exchange rate depreciation, External Debt, Foreign currency, Foreign currency debt, GDP ratio, Global, Meaning appreciation, Real Exchange Rate, Real exchange rates, Sovereign Defaults, Tradable goods, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/037
Stock No:

WPIEA2016037
ISBN:

9781475597738
ISSN:

1018-5941

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