Sudden stops, external debt and the exchange rate
AbstractNew Zealand has accumulated substantial liabilities against the rest of the world reflecting persistent current account deficits over the past 30 years. International evidence suggests that when international creditors become unwilling to continue to fund a country’s external liabilities (a situation known as a ‘sudden stop’), the consequences for an economy can be severe. Adjustment has tended to be more painful and disruptive for countries where debt is foreign currency denominated, or in those without an independently floating national currency. This article argues that a disruption to New Zealand’s access to external funding could be less disruptive due to the country’s freely-floating exchange rate and the fact that the external debt is, in effect, denominated primarily in New Zealand dollars (NZD). The nature of New Zealand’s exports suggests that an exchange rate depreciation would help to adjust New Zealand’s trade balance relatively rapidly, which would assist in placing the country’s net f oreign liabilities on a more sustainable path and rebuilding market confidence in New Zealand investments.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.
Volume (Year): 74 (2011)
Issue (Month): (December)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Hargreaves & C John McDermott, 1999. "Issues relating to optimal currency areas: theory and implications for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, September.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2011.
"The Forgotten History of Domestic Debt,"
Royal Economic Society, vol. 121(552), pages 319-350, 05.
- Bussière, Matthieu & Peltonen, Tuomas, 2008.
"Exchange rate pass-through in the global economy – the role of emerging market economies,"
BOFIT Discussion Papers
25/2008, Bank of Finland, Institute for Economies in Transition.
- Bussière, Matthieu & Peltonen, Tuomas A., 2008. "Exchange rate pass-through in the global economy: the role of emerging market economies," Working Paper Series 0951, European Central Bank.
- Carmen M. & M. Belen Sbrancia, 2011.
"The Liquidation of Government Debt,"
Working Paper Series
WP11-10, Peterson Institute for International Economics.
- Catherine Schenk & John Singleton, 2007. "New Zealand’s Exchange Rate Regime, the Collapse of Bretton Woods,and the Twilight of the Sterling Area," WEF Working Papers 0030, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
- Murray, John, 1999. "Why Canada Needs a Flexible Exchange Rate," Working Papers 99-12, Bank of Canada.
- Gagnon, Joseph E., 2009.
"Currency crashes and bond yields in industrial countries,"
Journal of International Money and Finance,
Elsevier, vol. 28(1), pages 161-181, February.
- Joseph E. Gagnon, 2005. "Currency crashes and bond yields in industrial countries," International Finance Discussion Papers 837, Board of Governors of the Federal Reserve System (U.S.).
- Anne-Marie Brook & David Hargreaves, 2000. "A macroeconomic balance measure of New Zealand's equilibrium exchange rate," Reserve Bank of New Zealand Discussion Paper Series DP2000/09, Reserve Bank of New Zealand.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre).
If references are entirely missing, you can add them using this form.