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Sovereign debt responses to the COVID-19 pandemic

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  • Zheng, Huanhuan

Abstract

We utilize the global natural experiment created by the COVID-19 outbreak to identify sovereign borrowing capacity in time of need and its determinants. First, we demonstrate that the pandemic creates exogeneous shocks to sovereign borrowing needs—governments borrowed more when hit by more severe pandemic shocks. Second, we show that credible fiscal rules enhance sovereign borrowing capacity, while unsustainable debts in terms of high debt-to-GDP ratio, rollover risk, and sovereign default risk weaken it. Third, we find that, in response to the same pandemic shock, sovereign spreads increase more in emerging economies than advanced economies though the former borrow less during the pandemic. Finally, further analysis reveals that pegged exchange rate regimes, open capital accounts, and monetary dependence improve emerging economies' borrowing capacity.

Suggested Citation

  • Zheng, Huanhuan, 2023. "Sovereign debt responses to the COVID-19 pandemic," Journal of International Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:inecon:v:143:y:2023:i:c:s0022199623000521
    DOI: 10.1016/j.jinteco.2023.103766
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    More about this item

    Keywords

    Sovereign debt; Fiscal policy; Fiscal rule; Sovereign bond; Debt overhang; Rollover risk;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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