Inelastic Demand Meets Optimal Supply of Risky Sovereign Bonds

• Tác giả: Matías Moretti
• Ngôn ngữ: eng
• Ký hiệu phân loại: 590.93 Animals
• Thông tin xuất bản: Washington, DC: World Bank, 2024
• Bộ sưu tập: Tài liệu truy cập mở
• ID: 296906
• Chủ đề: 1. EMERGING MARKETS BOND INDEX; 2. INELASTIC FINANCIAL MARKETS; 3. INSTITUTIONAL INVESTORS; 4. INTERNATIONAL CAPITAL MARKETS; 5. SMALL OPEN ECONOMIES

Tóm tắt

This paper presents evidence of inelastic demand in the market for risky sovereign bonds and examines its interplay with government policies. The methodology combines bond-level evidence with a structural model featuring endogenous bond issuances and default risk. Empirically, the paper exploits monthly changes in the composition of a major bond index to identify flow shocks that shift the available bond supply and are unrelated to country fundamentals. The paper finds that a 1 percentage point reduction in the available supply increases bond prices by 33 basis points. Although exogenous, these shocks might influence government policies and expected bond payoffs. The paper identifies a structural demand elasticity by feeding the estimated price reactions into a sovereign debt model that isolates endogenous government responses. These responses account for a third of the estimated price reactions. By penalizing additional borrowing, inelastic demand acts as a commitment device that reduces default risk.