The current globalized economic environment has made Emerging Market Economies (EMEs) highly exposed to global economic shocks. During the Covid-19 pandemic, EMEs have been facing increased health costs and heightened demand for fiscal stimulus. In addition, most EMEs experienced currency depreciation, reversal in capital flow, decrease in global demand and significant decline in domestic revenue, leading to a potential increase in sovereign bond risk premiums (SRP). Using dynamic panel estimations and focusing on 12 countries, we find that the Covid-19 pandemic impacts SRP primarily through GDP growth and political stability indicators. In addition, we find the real exchange rate and net export to GDP ratio have a statistically significant impact on sovereign bond risk premium.
Theory predicts that a fixed exchange rate regime will be abandoned after a sizable economic shock as currency devaluation could stimulate exports and output. However, devaluation is risky as the new level of the exchange rate and the rate of inflation cannot be predicted. We show that this uncertainty creates resistance to devaluation. Policymakers prefer to maintain the fixed exchange rate and to undergo internal adjustment. We illustrate the point theoretically and provide supporting evidence from Bulgaria's currency board.
Gaining international clout is an important motivation in pursuing monetary integration, as small country merge into a larger entity that can project more global power. We provide evidence to that effect using survey data from Kenya pertaining to public support for the proposed East African Monetary Union. We show that Kenyans prefer a larger union with more members for the purpose of gaining global clout. However, not all potential member countries are equally welcomed. Larger and more stable countries are favored over fragile states.
JEL Classifications: F33, E5
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