Endogenous risk premium and terms of trade shocks: evidence for developing countries

Congreso; XLVII Reunión Anual de la Asociación Argentina de Economía Política; 2012

This paper assesses whether the increase in terms of trade provokes a reduction in the endogenous risk premium in developing countries. Following Gertler and Rogoff [1990] we suppose that the risk premium in economies affected by moral hazard in credit markets depends negatively on the size of the collateral (i.e. natural resources) that guarantee the liabilities. The hypothesis is that terms-of-trade shocks raise the value of this collateral. We alternatively apply five panel data estimation procedures (POLS, FGLS, RE, FE and FE-FGLS) to two alternative data sets. According to the World Bank procedure we classify countries into four income groups.