Global Monetary Tightening: Emerging Markets Debt Dynamics and Fiscal Crises

Abstract

This paper finds that tightening global financial conditions can worsen emerging economies’ public debt dynamics through an increasing interest rate-growth differential, particularly if coupled with high global risk aversion. Latin America and emerging Europe are the regions most likely to be adversely affected. In addition, historical evidence — analyzed by means of a Poisson count model — suggests that the frequency of sovereign debt crises increases in emerging economies at the early stage of U.S. monetary tightening cycles, at times in which the term spread also rises. The timing may be related to abrupt switches of expectations about the future course of policy in the early stages of tightening cycles.

Keywords: Public debt, Emerging markets, Sovereign debt, United States, Monetary policy, Spillovers, Financial crises, Debt dynamics, sovereign debt crisis, unconventional monetary policy, U.S. economy, bond, interest, bond yields, interest rates, debt crises, risk aversion, emerging economies, long-term bond yields, capital flows, bond markets, monetary fund, investors, long-term interest, default, long-term interest rates, banking crises, liquidity, default risk, central bank, lending, currency, sovereign default, markets developments, instruments, developing countries, long-term yields, bonds, currency depreciation, bond index, reserve, international lending, domestic bond, short term interest rate

JEL Classification: E52, F34, F42