Premium
Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries
Author(s) -
JAHJAH SAMIR,
WEI BIN,
YUE VIVIAN ZHANWEI
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12052
Subject(s) - bond , monetary economics , exchange rate , developing country , economics , sovereignty , exchange rate regime , basis point , international economics , financial system , finance , politics , political science , law , economic growth
This paper analyzes how exchange rate policy affects the issuance and pricing of sovereign bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher spreads and are less likely to issue bonds. Changing a free‐floating regime to a fixed regime decreases the likelihood of bond issuance by 5.5% and increases the spread by 88 basis points on average. Countries with real overvaluation have higher spreads and higher bond issuance probabilities. The effects of real overvaluation on sovereign bonds tend to be magnified for countries with fixed exchange rate regimes.