Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America

Carlos E. Schonerwald da Silva and Matías Vernengo

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: The relationship between the exchange rate and public debt is intermediated by two mechanisms. On the one hand, exchange rate devaluation implies higher payment on local currency over the debt denominated in foreign currency. On the other hand, the rise of public debt leads a perception of higher default risk, forcing capital outflows and a devaluation of the exchange rate. The present paper develops a simple model where the exchange is crucial to analyze public debt dynamics. The paper also discusses the recent trajectory of the public debt in Latin America. The dynamics of the exchange rate is important for developing countries that do not have strong currencies and have a significant portion of public debt denominated in US dollars (original sin). Also, primary budget surpluses were crucial for the consistent and significant reduction of the public debt-to-GDP ratio. Hence, the economic expansion has created a larger fiscal space for Latin American economies to expand infrastructure and social spending, and reduce unemployment levels.

Keywords: Exchange Rate; Public Debt; Latin America (search for similar items in EconPapers)
JEL-codes: F31 H60 O54 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Political Economy of the Public Budget in the Americas, Diego Sánchez-Ancochea and Iwan Morgan (eds.), London: Institute for the Study of the Americas, 2009.

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Persistent link: https://EconPapers.repec.org/RePEc:uta:papers:2007_02

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