Debt Valuation Effects when there is Foreign Currency-Denominated Debt

Claudia Martínez and Rodrigo Rodrigo Vergara.
Authors registered in the RePEc Author Service: Rodrigo Vergara ()

No 363, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This paper discusses the way in which the existence of debt denominated in both domestic and foreign currency affects debt-sustainability analyses. Ignoring valuation issues can lead to misleading conclusions regarding fiscal sustainability. We show that a devaluation of the domestic currency can significantly change the path of a sustainable fiscal policy. In our model, the adjustment not only comes through the change in the value of the foreign currency-denominated public debt, but also though the effects on the interest rate and growth. We find that the required fiscal adjustment to achieve fiscal sustainability 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 that is denominated in foreign currency.

Keywords: Public debt; valuation effects; debt management (search for similar items in EconPapers)
JEL-codes: F34 H63 H87 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:363

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