Comments on “Determinants of Sovereign Risk Premiums for European Emerging Markets” by Dumicic and Ridzak

Kenichi UedaInternational Monetary Fund

Young Economists Seminar,Dubrovnik, June 23, 2010

The views expressed in this paper are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board or its management.

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Summary of the PaperSummary of the Paper

The paper investigates which factors affect sovereign risk premium for European EMs. Well documented.

Factors are Global risk appetite measured by VIX** Country specific macro fundamentals (lagged)

GDP growth ** Δ Govt debt/GDP Inflation* ; Δ CB reserve/GDP Δ CA deficit/GDP; External debt growth; Δ Imports/GDP EU accession process** “advanced” EM group (assumed to have low vulnerability)

Interaction terms (VIX x CA, x ExtDebt, x Group*)

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Comment 1: Interaction termsComment 1: Interaction terms

Interactions are interesting and important Given the same global shock to risk appetite

(VIX), how the sovereign risk premiums respond differently among countries?

Better to look at more interaction termsGDP growth, inflation, etc.

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Comment 2: A deeper questionComment 2: A deeper questionDifference in response to VIX reflects also

(future) fundamentals.What is the mechanism that affects the

economic performance (and thereby the risk premium) when the global investors’ risk appetite suddenly changed?

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Comment 3: Example, Bloom (2009)Comment 3: Example, Bloom (2009)

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Comment 3: Implications by BloomComment 3: Implications by BloomRise in uncertainty affects economic

performance, depending on rigidities in factor markets--both labor and investment. “Fundamental” variables are endogenously

determined.More rigid worse performance

Also see, Blanchard and Gali on oil price; Claessens, Ueda, and Yafeh on investment (tomorrow)

More flexible economy can whether shocks better