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

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Author Info

  • Carrera, Claudia Martínez
  • Vergara, Rodrigo

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.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 40 (2012)
Issue (Month): 9 ()
Pages: 1762-1783

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Handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1762-1783

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Web page: http://www.elsevier.com/locate/worlddev

Related research

Keywords: public debt; valuation effects; interest rate; growth rate; Latin American countries; Chile;

References

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