Foreign Debt and Fear of Floating: A Theoretical Exploration

Michael Bleaney and Gulcin Ozkan

Discussion Papers from University of Nottingham, School of Economics

Abstract: This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Unlike indexed domestic debt, foreign debt is subject to valuation effects from real exchange rate shocks. In a standard set-up, where a peg functions only as a nominal anchor, more foreign debt makes pegging less attractive, because it increases the value of a flexible exchange rate as a shock absorber. This result can be reversed if we incorporate the stylized fact that pegs have lower real exchange rate volatility, and if external shocks are sufficiently large relative to domestic shocks.

Keywords: inflation; output; public debt and exchange rate regimes (search for similar items in EconPapers)
Date: 2008-03
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Working Paper: Foreign Debt and Fear of Floating: A Theoretical Exploration (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:not:notecp:08/03

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