A Model of External Debt Sustainability and Monetary Hierarchy

Nicolas M. Burotto

Economics Working Paper Archive from Levy Economics Institute

Abstract: The author develops a dynamic macroeconomic model of a small open economy to identify two key vulnerabilities that prevent emerging markets from fully integrating into global markets: high financial integration costs and their low position in the international monetary hierarchy. These vulnerabilities make them susceptible to financial traps, jeopardize debt sustainability, and increase volatility. He shows that the weak response of capital flows to interest rates further limits the ability of monetary policy to stabilize the system. As a result, these economies have restricted policy options and often resort to mimicking external monetary policy strategies in times of financial distress.

Keywords: external debt sustainability; currency hierarchy; financial trap; balance of payments constraint; subordinated integration (search for similar items in EconPapers)
JEL-codes: E12 E32 E44 F34 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-inv and nep-mac
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