Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America
AbstractThe relationship between the exchange rate and public debt is intermediated by two mechanisms. On the one hand, exchange rate devaluation implies higher payment on local currency over the debt denominated in foreign currency. On the other hand, the rise of public debt leads a perception of higher default risk, forcing capital outflows and a devaluation of the exchange rate. The present paper develops a simple model where the exchange is crucial to analyze public debt dynamics. The paper also discusses the recent trajectory of the public debt in Latin America. The dynamics of the exchange rate is important for developing countries that do not have strong currencies and have a significant portion of public debt denominated in US dollars (original sin). Also, primary budget surpluses were crucial for the consistent and significant reduction of the public debt-to-GDP ratio. Hence, the economic expansion has created a larger fiscal space for Latin American economies to expand infrastructure and social spending, and reduce unemployment levels.
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Bibliographic InfoPaper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2007_02.
Length: 21 pages
Date of creation: 2007
Date of revision:
Publication status: Published in Political Economy of the Public Budget in the Americas, Diego Sánchez-Ancochea and Iwan Morgan (eds.), London: Institute for the Study of the Americas, 2009.
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More information through EDIRC
Exchange Rate; Public Debt; Latin America;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-11 (All new papers)
- NEP-CBA-2007-06-11 (Central Banking)
- NEP-IFN-2007-06-11 (International Finance)
- NEP-PBE-2007-06-11 (Public Economics)
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.:
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Stock-Flow with Consistent Accounting (SFCA) models
by Matias Vernengo in Naked Keynesianism on 2012-07-21 14:49:00
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