Exchange rates, foreign currency exposure and sovereign risk

We quantify the causal link between exchange rate movements and sovereign risk of 16 major emerging market economies (EMEs) by means structural vector autoregressive models (SVARs) conditional on data from 10/2004 through 12/2016. apply a novel data-based identification approach shocks that allows to account for complex interrelations within triad rates, risks interest rates. The direction size response FX depend considered type measure net foreign currency exposure an economy. A depreciation domestic against USD increases risk. In contrast, when looking at nominal effective is unrelated changes rate, we find in general no significant effect. conclude ‘financial channel’ more important transmission comparison with traditional ‘net trade channel’. Moreover, confirm prime role mismatch non-public sector strength