Moretti, MatíasPandolfi, LorenzoSchmukler, Sergio L.Villegas Bauer, GermánWilliams, Tomás2024-03-262024-03-262024-03-26https://hdl.handle.net/10986/41288This paper presents evidence of inelastic demand in the market for risky sovereign bonds and examines its interplay with government policies. The methodology combines bond-level evidence with a structural model featuring endogenous bond issuances and default risk. Empirically, the paper exploits monthly changes in the composition of a major bond index to identify flow shocks that shift the available bond supply and are unrelated to country fundamentals. The paper finds that a 1 percentage point reduction in the available supply increases bond prices by 33 basis points. Although exogenous, these shocks might influence government policies and expected bond payoffs. The paper identifies a structural demand elasticity by feeding the estimated price reactions into a sovereign debt model that isolates endogenous government responses. These responses account for a third of the estimated price reactions. By penalizing additional borrowing, inelastic demand acts as a commitment device that reduces default risk.en-USCC BY 3.0 IGOEMERGING MARKETS BOND INDEXINELASTIC FINANCIAL MARKETSINSTITUTIONAL INVESTORSINTERNATIONAL CAPITAL MARKETSSMALL OPEN ECONOMIESSOVEREIGN DEBTWorking PaperWorld Bank10.1596/1813-9450-10735