Sovereign debt cost and economic complexity

This paper investigates how a country's economic complexity impacts its sovereign yield spread relative to the U.S. A one-unit increase in the Economic Complexity Index reduces the 10-year yield spread by about 61 basis points, though this effect is non-significant for maturities under three years, affecting the spread curve slope. Using causal machine learning and predictive models, economic complexity is a top predictor alongside inflation and institutional factors. The paper explores mechanisms through which economic complexity reduces sovereign risk, emphasizing its role in productivity, output, income stability, and the likelihood of fiscal crises.