Pricing Sovereign Debt in Resource-Rich Economies

Thomas McGregor

No 2019/240, IMF Working Papers from International Monetary Fund

Abstract: How do oil price movements affect sovereign spreads in an oil-dependent economy? I develop a stochastic general equilibrium model of an economy exposed to co-moving oil price and output processes, with endogenous sovereign default risk. The model explains a large proportion of business cycle fluctuations in interest-rate spreads in oil-exporting emerging market economies, particularly the countercyclicallity of interest rate spreads and oil prices. Higher risk-aversion, more impatient governments, larger oil shares and a stronger correlation between domestic output and oil price shocks all lead to stronger co-movements between risk premiums and the oil price.

Keywords: WP; oil price; open economy; Risk premium; natural resources; sovereign debt; and default; development; cost parameter; policy makers; oil revenue cost; standard deviation terms; equilibrium bond price; oil price volatility; oil revenue cost of default; oil price state; steady-state price; steady state bond price; output volatility; Oil prices; Emerging and frontier financial markets; Asset prices; Consumption; Oil; gas and mining taxes; Global; Sub-Saharan Africa; Asia and Pacific (search for similar items in EconPapers)
Pages: 30
Date: 2019-11-08
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