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Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America

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  • Carlos E. Schonerwald da Silva
  • Matías Vernengo

Abstract

The 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 Info

Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2007_02.

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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.
Handle: RePEc:uta:papers:2007_02

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Keywords: Exchange Rate; Public Debt; Latin America;

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References

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  1. Alcino F. Câmara Neto & Matias Vernengo, 2004. "Fiscal Policy and the Washington Consensus: A Post Keynesian Perspective," Working Paper Series, Department of Economics, University of Utah 2004_09, University of Utah, Department of Economics.
  2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  3. Gale, William G. & Orszag, Peter R., 2003. "Economic Effects of Sustained Budget Deficits," National Tax Journal, National Tax Association, vol. 56(3), pages 463-85, September.
  4. J. Bradford De Long & Lawrence H. Summers, . "Equipment Investment and Economic Growth," J. Bradford De Long's Working Papers _122, University of California at Berkeley, Economics Department.
  5. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134 National Bureau of Economic Research, Inc.
  6. David Aschauer, 1988. "Does public capital crowd out private capital?," Staff Memoranda 88-10, Federal Reserve Bank of Chicago.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Stock-Flow with Consistent Accounting (SFCA) models
    by Matias Vernengo in Naked Keynesianism on 2012-07-21 14:49:00
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Cited by:
  1. Carlos Schönerwald & Nathan Perry, 2008. "Institutions, Geography, and Terms of Trade in Latin America: A Longitudinal Econometric Analysis," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807211626390, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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