A structural model of sovereign debt issuance : assessing the role of financial factors

Abstract

The role that domestic and international financial conditions have in shaping developing countries’ governments’ debt structure is structurally estimated using data on individual bond issuance. The structural model, which uses financial and demographic conditions to achieve identification, is used to estimate three key characteristics of sovereign bonds: issue size, maturity and spread. To minimize sample selection concerns, in a first step, the issuance decision is studied by means of a probit model. Results show that better developed domestic financial markets and looser international financial conditions raise developing countries ability to tap international markets and, mainly through their effect on the spreads, are important determinants of the observed debt structure. We find evidence of complementarities between domestic financial deepening and financing conditions in global markets