US real interest rates and default risk in emerging economies

We empirically analyse the appropriateness of indexing emerging market sovereign debt to USreal interest rates. We find that policy-induced exogenous increases in US rates raise default riskin emerging market economies, as hypothesised in the theoretical literature. However, we also findevidence that omitted variables which simultaneously increase US real interest rates and reduce therisk of default dominate the hypothesised relationship. We can only conclude that it’s not a goodidea to index emerging market bonds to US real interest rates.[...]