Does Macroeconomic Transparency Help Governments Be Solvent? Evidence from Recent Data

Abstract

This paper investigates whether macroeconomic and data transparency standards lead to lower borrowing costs in sovereign bond markets. We essentially show that emerging market countries which subscribed to the Special Data Dissemination Standard (SDDS) experienced a significant decline in borrowing cost proxied by sovereign yield spreads on secondary markets. However, the adherence of these markets to the Code of Good Practices on Transparency in Monetary and Financial Policies caused a significant increase in the yield spreads. There is no impact of the adherence to the Code of Good Practices in Fiscal Transparency on the changes of sovereign spreads. In addition, the results suggest that a debtor country's internal liquidity factor (measured by the total reserves to total external debt service ratio) and external liquidity conditions (measured by the yield on US long-term bond) are the most important determinants of emerging market spreads.

Keywords: emerging markets, transparency, standards and codes, international financial architecture, sovereign debt and yield spreads

JEL Classification: C23, E42, F34, G18