Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Vivian Z. Yue, Samir Jahjah
2004 IMF Working Papers  
This paper empirically analyzes how exchange rate policy a¤ects the issuance and pricing of international bonds for developing countries. We ...nd that countries with less ‡exible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free- ‡oating regime to a ...xed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation
more » ... have higher bond spreads and higher bond issuance probabilities. Moreover, such positive e¤ects of real exchange rate overvaluation tend to be magni...ed for countries with ...xed exchange rate regimes. Our results suggest that choosing a less ‡exible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued.
doi:10.5089/9781451874822.001 fatcat:iwuv7jb43zhinjtm2llfhihjha