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

Claudia Martínez Carrera and Rodrigo Vergara ()

World Development, 2012, vol. 40, issue 9, 1762-1783

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.

Keywords: public debt; valuation effects; interest rate; growth rate; Latin American countries; Chile (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0305750X12000940
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:40:y:2012:i:9:p:1762-1783

DOI: 10.1016/j.worlddev.2012.04.024

Access Statistics for this article

World Development is currently edited by O. T. Coomes

More articles in World Development from Elsevier
Bibliographic data for series maintained by Catherine Liu ().