Battaglia, Juan Jose2024-11-282024-11-282024-11Battaglia, Juan Jose (2022). "The role of international reserves and FDI in offsetting external debt risk". REM Working paper series, nº 0355/20242184-108Xhttp://hdl.handle.net/10400.5/95735This paper investigates the relationship between sovereign spreads and external assets and liabilities. To address potential endogeneity concerns, we employ a panel VAR model within a generalized method of moments (GMM) framework on a sample of 59 countries, encompassing 18 advanced economies and 41 emerging markets, over the period from 1996 to 2021. The findings reveal that a positive shock to international reserves (IIRR) assets (measured as a ratio to GDP) leads to a significant decrease in sovereign spreads. Conversely, a positive shock to the external debt to GDP ratio leads to a significant increase in sovereign spreads. Both effects are stronger in emerging markets. The responses of spreads to shocks in foreign direct investment (FDI) liabilities are less clear, highlighting that not all foreign liabilities have the same effect on the cost of international credit. We corroborate the robustness of the results using the local projection method and a variety of additional tests.engSovereign spreadExternal asset and liabilitiesPanel VARworking paper