International Finance Discussion Papers (IFDP)

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August 2012

U.S. Real Interest Rates and Default Risk in Emerging Economies

Nathan Foley-Fisher and Bernardo Guimaraes

Abstract:

This paper empirically investigates the impact of changes in U.S. real interest rates on sovereign default risk in emerging economies using the method of identification through heteroskedasticity. Policy-induced increases in U.S. interest rates starkly raise default risk in emerging market economies. However, the overall correlation between U.S. real interest rates and the risk of default is negative, demonstrating that the effects of other variables dominate the anterior relationship.

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Keywords: Real interest rates, default risk, sovereign debt, identification through heteroskedasticity

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Last Update: July 10, 2020