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Fiscal Sustainability: The Impact of Real Exchange Rate Shocks on Debt Valuation, Interest Rates and GDP Growth
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Fiscal Sustainability: The Impact of Real Exchange Rate Shocks on Debt Valuation, Interest Rates and GDP Growth

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  • Carrera, Claudia Martínez
  • Vergara, Rodrigo

Abstract

This paper discusses the way in which the existence of foreign currency debt affects debt-sustainability analysis. We show that a devaluation of the local currency can significantly change the path of a sustainable fiscal policy. Our model expands previous research as the adjustment comes not only through changes in the value of the foreign-currency-denominated debt, but also through the effects of the devaluation on interest rates and economic growth. We find that the fiscal adjustment required after a devaluation increases with the size of the devaluation, the length of the adjustment period, the effect on interest rates and growth, and the share of public debt denominated in foreign currency.

Suggested Citation

  • Carrera, Claudia Martínez & Vergara, Rodrigo, 2012. "Fiscal Sustainability: The Impact of Real Exchange Rate Shocks on Debt Valuation, Interest Rates and GDP Growth," World Development, Elsevier, vol. 40(9), pages 1762-1783.
    • Handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1762-1783
    DOI: 10.1016/j.worlddev.2012.04.024
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    5. Aderemi Timothy Ayomitunde & Fagbola Lawrence Olusegun & Sokunbi Gbenro Matthew & Ebere Chidinma Edith, 2020. "Investigating External Debt and Exchange Rate Fluctuations in Nigeria: Any Difference with ARDL Model?," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 65(3), pages 53-64, December.
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    7. Dong, Baomin & Ma, Xili & Wang, Ningjing & Wei, Weixian, 2020. "Impacts of exchange rate volatility and international oil price shock on China's regional economy: A dynamic CGE analysis," Energy Economics, Elsevier, vol. 86(C).
    8. Blessy Augustine & Lakshmi Kumar, 2020. "Original Sin, Currency Depreciation and External Debt Burden: Evidence from India," International Journal of Economics and Financial Issues, Econjournals, vol. 10(3), pages 58-68.
    9. Hiep Ngoc Luu & Nguyen Hanh Luu & Huong Thi Thu Phung, 2024. "Would external debts promote sustainable development in emerging and low‐income countries?," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(2), pages 1110-1128, March.
    10. Rudra P. Pradhan & Mak B. Arvin & Sara E. Bennett & Mahendhiran Nair & John H. Hall, 2016. "Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(2), pages 175-201, June.
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