| Description |
1 Online-Ressource |
| Series |
Policy Research Working Paper 10735 |
| Summary |
This paper presents evidence of inelastic demand in the market for risky sovereign bonds and examines its interplay with government policies. The methodology combines bond-level evidence with a structural model featuring endogenous bond issuances and default risk. Empirically, the paper exploits monthly changes in the composition of a major bond index to identify flow shocks that shift the available bond supply and are unrelated to country fundamentals. The paper finds that a 1 percentage point reduction in the available supply increases bond prices by 33 basis points. Although exogenous, these shocks might influence government policies and expected bond payoffs. The paper identifies a structural demand elasticity by feeding the estimated price reactions into a sovereign debt model that isolates endogenous government responses. These responses account for a third of the estimated price reactions. By penalizing additional borrowing, inelastic demand acts as a commitment device that reduces default risk |
| Analysis |
Emerging Markets Bond Index |
|
Inelastic Financial Markets |
|
Institutional Investors |
|
International Capital Markets |
|
Small Open Economies |
|
Sovereign Debt |
| Notes |
English |
|
en_US |
| Form |
Electronic book
|
| Author |
Moretti, Matías VerfasserIn.
|
|
Pandolfi, Lorenzo VerfasserIn.
|
|
Schmukler, Sergio L. VerfasserIn.
|
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Villegas Bauer, Germán VerfasserIn.
|
|
Williams, Tomás VerfasserIn.
|
|
