This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 advanced and developing countries. Using annual data over the 2004-2020 period, we find that infectious-disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, our granular analysis using high-frequency (daily) data indicates that the COVID-19 pandemic has had a significant impact on market-implied sovereign default risk. This adverse effect appears to be more pronounced in advanced economies, which may reflect the greater severity of the pandemic and depth of the ensuing economic crisis in these countries as well as widespread underreporting in developing countries due to differences in testing availability and institutional capacity. While our analysis also shows that more stringent domestic containment measures help lower sovereign CDS spreads, the macro-fiscal cost of efforts aimed at curbing the spread of the disease could undermine credit worthiness and eventually push the cost of borrowing higher.
The consequences of large depreciations on economic activity depend on the relative strength of the contractionary balance sheet and expansionary expenditure switching effects. However, the two operate over different time horizons: the balance sheet effect hits almost immediately, while expenditure switching is delayed by nominal rigidities and other frictions. The paper hypothesizes that the overshooting phase—observed early in the depreciation episode and driven by the balance sheet effect—is largely irrelevant for expenditure switching, which is more closely aligned with ex-post equilibrium depreciation. Given this, larger real exchange rate overshooting should signal a relatively stronger balance sheet effect. Empirical findings support this hypothesis: (i) overshooting is driven by factors associated with the balance sheet effect (high external debt, low reserves, low trade openness), (ii) overshooting-based measures of the balance sheet effect foreshadow post-depreciation output losses, and (iii) the balance sheet effect is strongest early on, while expenditure switching strengthens over the medium term.
Mr. Itai Agur, Melissa Chan, Mr. Mangal Goswami, and Mr. Sunil Sharma
The paper investigates the international integration of EM sovereign dollar-denominated
and local-currency bond markets. Factor analysis is used to examine movements in
sovereign bond yields and common sources of yield variation. The results suggest that EM
dollar-denominated sovereign debt markets are highly integrated; a single common factor
that is highly correlated with US and EU interest rates explains, on average, about 80
percent of the total variability in yields. EM sovereign local currency bond markets are not
as internationally integrated, and three common factors explain about 74 percent of the
total variability. But a factor highly correlated with US and EU interest rates still explains
63 percent of the yield variation accounted for by common factors. That said, there is
some diversity among EM countries in the importance of common factors in affecting
sovereign debt yields.
This paper examines the policy challenges a country faces when it wants to both reduce inflation and maintain a sustainable external position. Mundell’s (1962) policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly coordinated. Unfortunately, if the fiscal authority is unwilling to cooperate—a case of fiscal intransigence—central banks that pursue a disinflation on a ‘go it alone’ basis will cause the country’s external position to further deteriorate. A dynamic analysis shows that if the central bank itself lacks credibility in its inflation goal, it must rely even more on cooperation from the fiscal authority than otherwise. Echoing Sargent and Wallace’s (1981) ‘unpleasant monetarist arithmetic,’ in these circumstances, a ‘go it alone’ policy may successfully stabilize prices and output, but only on a short-term basis.
The September 2015 issue of the IMF Research Bulletin covers a range of research topics. The Research Summaries featured in this issue are “Lower for Longer: Neutral Rates in the United States” (Andrea Pescatori and Jarkko Turunen) and “Economic Principles for Resource Revenue Management” (Anthony J. Venables and Samuel Wills). The Q&A article looks at “Seven Questions on Financing for Development” (Amadou Sy) and the global development agenda. The issue also includes special announcements on the 2015 Annual Research Conference and the 2015 IMF Annual Report, as well as new IMF publications. Readers will also find a link to a top-viewed article from the “IMF Economic Review”—the IMF’s official research journal.
Mr. Eugenio M Cerutti, Mr. Stijn Claessens, and Mr. Damien Puy
This paper analyzes the behavior of gross capital inflows across 34 emerging markets (EMs).
We first confirm that aggregate inflows to EMs co-move considerably. We then report three
findings: (i) the aggregate co-movement conceals significant heterogeneity across asset types
as only bank-related and portfolio bond and equity inflows do co-move; (ii) while global
push factors in advanced economies mostly explain the common dynamics, their relative
importance varies by type of flow; and (iii) the sensitivity to common dynamics varies
significantly across borrower countries, with market structure characteristics (especially the
composition of the foreign investor base and the level of liquidity) rather than borrower
country’s institutional fundamentals strongly affecting sensitivities. Countries relying more
on international funds and global banks are found to be more sensitive to push factors. Our
findings suggest that EMs need to closely monitor their lenders and investors to assess their
inflow exposures to global push factors.