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External Debt, Budget Deficits and Disequilibrium Exchange Rates

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  • Rudiger Dornbusch

Abstract

The paper investigates the sources of debt and debt difficulties for a group of Latin American countries. It is argued that external shocks -- oil, interest rates, world recession and the fall in real commodity prices -- cannot account by themselves for the problems. Budget deficits that accommodate terms of trade deterioration and disequilibrium exchange rates are central to a complete explanation. The paper documents that in Chile an extreme currency overvaluation led to a massive shift into imported consumer durables while in Argentina overvaluation in conjunction with financial instability led to large-scale capital flight. In the case of Brazil the budget deficit is the explanation for the growth in external indebtedness.The difference in the experience of the three countries reflects the difference in their openness to the world economy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1336.

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Date of creation: Apr 1984
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Publication status: published as Dornbusch, Rudiger. "External Debt, Budget Deficits and Disequilibrium Exchange Rates." International Debt and the Developing Countries, edited by G . Smith and J. Cuddington. Washington D.C.: World Bank, (March 1985).
Handle: RePEc:nbr:nberwo:1336

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  1. Jeffrey Sachs, 1982. "LDC Debt in the 1980s: Risk and Reforms," NBER Working Papers 0861, National Bureau of Economic Research, Inc.
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. Maurice Obstfeld, 1983. "Intertemporal Price Speculation and the Optimal Current-Account Deficit," NBER Working Papers 1100, National Bureau of Economic Research, Inc.
  4. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-77, September.
  5. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
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