I argue that countries' dollar-denominated net external debt (dollar debt) helps explain the large differences in risk premia across currencies and how U.S. monetary policy affects the global economy. When the U.S. dollar strengthens, the real value of dollar debt increases, weakening the currencies of countries with large amounts of dollar debt and impeding their consumptions. Because the dollar tends to strengthen in bad times, high-dollar-debt currencies are bad hedges and thus have to offer high risk premia. My empirical findings support this idea. First, dollar debt captures exchange-rate and debt-issuance responses to U.S. monetary policy shocks. Second, dollar debt captures the cross-sectional variation in currency risk premia. I develop a general equilibrium model with financial frictions and currency choice of debt denomination that corroborates my findings. x 1. Empirically, Gourinchas et al. 2010 shows the dollar strengthens in global downturns. Theoretically, Hassan 2013, He et al. 2015, and Richmond 2016 propose why the dollar is a safe asset.
As interest rate-growth differentials (r-g) turned negative in many countries, governments consider pursuing fiscal expansion and the potential risks involved. Using a large sample of advanced and emerging economies, our analysis suggests that high public debts can lead to adverse future r-g dynamics. Specifically, countries with higher initial public debt experience (i) a shorter duration of negative r-g episodes and a higher probability of reversal, (ii) higher average r-g, and (iii) a more right-skewed r-g distribution, that implies higher down-side risks. Furthermore, high-debt countries experience larger increases in interest rates in response to (iv) an unexpected decline in domestic output and (v) an increase of global volatility. Results are stronger when public debts are denominated in foreign currencies.
This paper assembles a comprehensive sovereign green bond database and estimates the sovereign greenium. The development of green bond markets has been one of the most important financial breakthroughs in the domain of sustainable finance during the last 15 years. A central benefit associated with green bonds has been that they exhibit a positive green premium (greenium), i.e., a lower yield relative to a similar conventional bond. Yet, issuances at the sovereign level have been relatively recent and not well documented in the literature. We find that green bonds are issued at a relatively small premium (4 basis points on average) in Advanced Economies. Yet, importantly, the greenium is growing over time and is considerably larger (11 basis points on average) for Emerging Market Economies.
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