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Balance sheet effects and the country risk premium: An empirical investigation

Review of World Economics volume 140, pages 592–612 (2004)Cite this article

Abstract

Based on recent theories emphasizing financial imperfections, this paper is an empirical investigation of the link between a country's risk premium and the balance sheet effect of a devaluation. In a panel of emerging economies, balance sheet effects, due to increased external debt service after an unexpected real depreciation, significantly raise the risk premium. This result is robust to various checks and appears driven by those countries with the largest financial imperfections. Also, particularly large real depreciations turn out to be disproportionately important, meaning that balance sheet effects may be strongest at times of economic crisis. JEL no. F34, F41

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Authors and Affiliations

  1. Rutgers University, New Brunswick

    Juan Carlos Berganza, Roberto Chang & Alicia García Herrero

  2. Banco de España, Madrid

    Juan Carlos Berganza, Roberto Chang & Alicia García Herrero

  3. Economía y Relaciones Internacionales, Banco de España, Alcalá 50, 28014, Madrid, España

    Juan Carlos Berganza, Roberto Chang & Alicia García Herrero

Authors
  1. Juan Carlos Berganza
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  2. Roberto Chang
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  3. Alicia García Herrero
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Correspondence to Alicia García Herrero.

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Berganza, J.C., Chang, R. & Herrero, A.G. Balance sheet effects and the country risk premium: An empirical investigation. Rev. World Econ. 140, 592–612 (2004). https://doi.org/10.1007/BF02659616

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  • DOI: https://doi.org/10.1007/BF02659616

Keywords

  • Balance sheet effects
  • devaluation
  • liability dollarization