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External debt financing and macroeconomic instability in emerging market economies

Ashima Goyal, Rajeswari Sengupta () and Akhilesh Verma ()
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Akhilesh Verma: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: We study the relationship between external debt financing and risk to macroeconomic stability using a panel vector autoregression model for a sample of ten major emerging market economies. We also focus on the linkages of key channels of external debt financing, namely external debt securities and cross-border loans. We find that external debt securities substantially impact the yield spread and the exchange rate for emerging market economies, both before and after the global financial crisis of 2008. On the other hand, the impact of cross-border flows is found to be relatively subdued for these economies in the post-crisis period. We also find that emerging economies that were already receiving a high level of external debt securities inflows experienced a relatively larger yield compression and greater exchange rate pressure compared to the economies that had a low level of external debt securities flows. It indicates higher risk exposure for EMEs with larger external debt securities flows.

Keywords: External debt securities; cross border loans; financial stability risk; panel VAR (search for similar items in EconPapers)
JEL-codes: E44 E51 F34 F62 F65 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2019-05
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