Real Exchange Rate and External Public Debt in Emerging and Developing Countries

Grégory Donnat
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Grégory Donnat: Université Côte d'Azur, CNRS, GREDEG, France

No 2025-15, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: Developing countries implement policies to maintain a stable exchange rate, with export-led growth strategies to spur economic growth and stability. The real exchange rate is a key factor of external competitiveness but can also cause economic and financial disruptions. These countries are dependent on external financing which impacts the real exchange rate movements over the medium and long run. We empirically explore the response of the real exchange rate to external public indebtedness in developing countries, from 1975 to 2017, using the iterative Bayesian shrinkage procedure to handle the cross-country differences in panel data. The contribution to the literature is twofold. First, we find that the change in the real exchange rate depends on the external public indebtedness in an inverted U-shape relationship in developing countries. Second, we determine an external debt threshold that minimizes changes in the real exchange rate for each country.

Keywords: Real Exchange Rate; External Debt; Developing Countries; Heterogeneity (search for similar items in EconPapers)
JEL-codes: F31 F34 O16 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2025-04
New Economics Papers: this item is included in nep-fdg and nep-opm
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