Investor Sentiment, Sovereign Debt Mispricing, and Economic Outcomes*

• 成果类型: Article
• 署名作者: Al-Amine, Ramzy; Willems, Tim
• 署名单位: International Monetary Fund
• 刊物名称: ECONOMIC JOURNAL
• ISSN/ISSBN: 0013-0133
• DOI: 10.1093/ej/ueac067
• 发表日期: 2022
• 页码: 613-636
• 关键词: business cycles; spreads; RISK; aid

摘要

We find that countries able to borrow at spreads that seem low given fundamentals (e.g., because investors are bullish regarding the country's future) are more likely to develop medium-term difficulties. We establish this by regressing spreads on fundamentals. Subsequently deploying first-stage residuals in a second-stage regression suggests that an optimistic sentiment reduces growth in the medium term while increasing odds of fiscal crises. Incorporating information from our mispricing estimate reduces the root-mean-square error of out-of-sample growth forecasts by 15%. This supports theories of sentiment affecting the business cycle and suggests that countries should not solely rely on spreads when setting fiscal policy.