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External debt financing and macroeconomic instability in emerging market economies

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Rajeswari Sengupta

    (Indira Gandhi Institute of Development Research)

  • Akhilesh Verma

    (Indira Gandhi Institute of Development Research)

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.

Suggested Citation

  • Ashima Goyal & Rajeswari Sengupta & Akhilesh Verma, 2019. "External debt financing and macroeconomic instability in emerging market economies," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-013, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2019-013
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    Cited by:

    1. Ashima Goyal, 2021. "Using the snowball effect in Indian post Covid-19 paths to fiscal consolidation," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-016, Indira Gandhi Institute of Development Research, Mumbai, India.

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    More about this item

    Keywords

    External debt securities; cross border loans; financial stability risk; panel VAR;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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