(Joint with Samir Jahjah)
Abstract: This
paper analyzes how exchange rate policy affects the supply and pricing of
sovereign bonds
in
developing countries. We define an exchange rate policy by the de facto
exchange rate regime
and
the real exchange rate misalignment. We empirically investigate three main
channels through
which
the exchange rate policy impacts sovereign credit spreads. The paper finds that
(1) spreads
and
the likelihood of issuing bonds depend on the exchange rate regime; (2) real
exchange rate
overvaluation
significantly increases sovereign bond issuing and bond spreads; (3) bond
spreads
are
the highest when the exchange rate is overvalued and the exchange rate regime
is a hard peg.