The sovereign default risk of giant oil discoveries

Arbeitspapier

I study the impact of giant oil field discoveries on default risk. I document that interest rate spreads of emerging economies increase by 1.3 percentage points following a discovery of median size. I develop a sovereign default model with investment, three-sector production, and oil discoveries. Following a discovery, borrowing and investment increase. Capital reallocates from manufacturing toward oil and non-traded sectors, increasing the volatility of tradable income. Borrowing increases default risk and higher volatility increases the risk premium, both of which increase spreads. Discoveries generate welfare gains of 0.44 percent. Insurance against low oil prices increases these gains to 0.60.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2024-04

Classification and Topics

• Classification: Wirtschaft ; International Lending and Debt Problems ; Open Economy Macroeconomics ; Resource Booms
• Subject: Soveriegn default ; Oil Discoveries

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Esquivel, Carlos
• Event: Veröffentlichung
• (who): Rutgers University, Department of Economics
• (where): New Brunswick, NJ
• (when): 2024

Further information

• Handle: http://hdl.handle.net/10419/283999
• Last update: 10.03.2025, 11:42 AM CET