Debt Buildup and Currency Vulnerability: Evidence from Global Markets

Donghyun Park, Arief Ramayandi and Shu Tian

Emerging Markets Finance and Trade, 2022, vol. 58, issue 7, 2017-2035

Abstract: Debts have risen rapidly since the global financial crisis. While the literature acknowledges that rapid debt buildups can harm the economy and exacerbate recessions, their impact on currency vulnerability is still empirically under-investigated. This study examines how public and private debt buildups are related to currency depreciation pressure by analyzing the evidence from 59 advanced and emerging markets. Our results suggest that both private and public debt exacerbates currency vulnerability, but the effect of private debt is more robust and consistently significant. We also find that excessive private debt buildup is more harmful in emerging markets, and greater dependence on external financing exacerbates the impact of debt buildup on currency stress. Overall, the evidence highlights the importance of a comprehensive debt surveillance framework that monitors both public and private debt buildup, especially in emerging markets.

Date: 2022
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Working Paper: Debt Buildup and Currency Vulnerability: Evidence from Global Markets (2020)
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DOI: 10.1080/1540496X.2021.1949982

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